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North American Natural Gas Markets Presentation to ICoTA. October 22nd, 2009 J. Cameron Bailey CFA President and Chief Executive Officer. What Happened?. Canadian Well Completions 2007 19,144 2008 20,729 9,000 down 56% 2010 ?. Canadian Energy Financing - Activity.
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North American Natural Gas MarketsPresentation to ICoTA October 22nd, 2009 J. Cameron Bailey CFA President and Chief Executive Officer
What Happened? Canadian Well Completions 2007 19,144 2008 20,729 • 9,000 down 56% 2010 ? Acquire and Exploit
Canadian Energy Financing - Activity • Year to Date 2009 • $5.8 billion of New Equity • 83 transaction • Energy accounts for 26% of all equity deals completed in 2009 • Year to Date 2008 • $2.3 billion in 2008 • 64 transactions • Cash Flows = Activity Acquire and Exploit
Natural Gas Price Forecasting – When? • Supply • Old Supply – Decline Rates? • New Supply • Drilling Activity – Key Driver • Drilling Efficiencies • Production Additions • Demand • Base Demand • Weather Acquire and Exploit
Historical Decline Rates US Production Declining by 30 - 35% per annum
Truth No. 1 - Production Declines! 2009 US Production 57.0 bcf/d Decline 25% 14.2 bcf/d Decline 30% 17.1 bcf/d Decline 35% 19.9 bcf/d Acquire and Exploit
US Natural Gas Production – Well Completions Acquire and Exploit
US Production Observations 2007 Production 51.8 bcf/d • January 2007 Average 49.6 bcf/d • 2007 Exit Rate 53.7 bcf/d • Production Additions 4.1 bcf/d • Decline 30% 14.8 bcf/d • 2007 Production Added 18.9 bcf/d • Gas Wells Completed 35,605 • Production Adds per Well 530 mcf/d 2008 Production 54.9 bcf/d • January 2008 Average 53.5 bcf/d • 2008 Exit Rate 56.6 bcf/d • Production Additions 3.1 bcf/d • Decline 30% 16.4 bcf/d • 2008 Production Added 19.6 bcf/d • Gas Wells Completed 36,432 • Production Added per Well 537 mcf/d Acquire and Exploit
Truth No 2. - Drilling Replaces Production Declines Acquire and Exploit
US Natural Gas Directed Rig Count – Future Supply? Source: Baker Hughes
700 Rigs Operating – Supply Acquire and Exploit
The Growing US Supply Deficit US Average Demand
US Natural Gas Production – Declining? USProduction Source: Bentek
US Production - Declining When? Source: Bentek Acquire and Exploit
Natural Gas - Investment Cycle Concept Land Acquisition Permits Rig Count – Baker Hughes Rig Count Completions Pipeline Construction & Tie-in Production – Daily Estimates Six Month Delay? Acquire and Exploit
Delayed Production Response – Natural Gas Drilling Activity in Texas New well permits are down 73% but there still remained a large inventory of wells to complete Well completions have dropped off which will be followed by production declines Source: Railroad Commission of Texas
Texas - Natural Gas Production - Declining Source: Railroad Commission of Texas
Canadian Gas Drilling Rig Count – Future Supply? Lowest levels witnessed in 10 years Acquire and Exploit Source: Baker Hughes
Canadian Gas Production - Declining Canadian gas production is declining leaving less for exports to the US Acquire and Exploit Source: NEB
Canadian Gas Export to the United States Source: Bentek
Production Forecast - Assumptions Acquire and Exploit
Production Decline Analysis – 700 Rigs Forecast Acquire and Exploit
Total US Natural Gas Demand – Recession? More affected by weather than recession Source: Bentek 2009
Recession and Demand? – Industrial Demand Industrial demand is off 1.3 bcf/d Y/Y but has recovered Acquire and Exploit Source: Bentek 2009
Recession and Demand? – Power Demand Power Demand continues to be strong. Acquire and Exploit Source: Bentek 2009
The Growing US Supply Deficit US Average Demand
Seasonal Affect on Demand – Forecasting? Acquire and Exploit
Natural Gas Inventories – Awash in Gas ? The difference between surplus and critically low inventories is 500 bcf = 8 days of consumption Acquire and Exploit Source: EIA
Forecast Gas Storage Levels – 700 Rigs Operating Average Gas Demand 3.8 TCF Storage Not enough gas production to fill storage in 2010 Acquire and Exploit
Forecast Gas Storage Levels – 700 Rigs Operating Mild Winter – Low Gas Demand - 2006 3.8 TCF Storage Acquire and Exploit
Forecast Gas Storage Levels – 700 Rigs Operating Cold Winter 2008 – Perfect Storm 3.8 TCF Storage Not enough gas production to fill storage in 2010 Acquire and Exploit
Change in Natural Gas Inventory – Supply/Demand Balance Acquire and Exploit Source: EIA
US Wellhead Prices vs US Natural Gas Rig Count Source: EIA Acquire and Exploit
Production Decline Analysis – Response from Drilling + 60 Rigs per month Return to Work Acquire and Exploit
Natural Gas Myths • New technology applied to Shales and Tight Sand plays have changed the game? • Fewer wells – more productivity – replacing declines? • Recession has destroyed Demand? • Demand is running at historical highs • Drilling efficiencies have improved? • Few rigs can drill more wells – only the best crews and equipment are currently working Acquire and Exploit
Drilling Rig Efficiency – Improving? Acquire and Exploit
Conclusions • The low pace of drilling activity cannot be sustained • Price response will anticipate supply shortages • Price response will create cash flow increase capital budgets Drilling Activity • Weather is the biggest factor to when supply shortages will emerge. Acquire and Exploit