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World’s fastest-growing O&G region Citi , PwC, GSAM on economic impacts of US energy windfall

World’s fastest-growing O&G region Citi , PwC, GSAM on economic impacts of US energy windfall. GDP effects +2%-3.3% higher 2020? Job creation 2.2/3.6 mln jobs? Current account deficit/trade balance Oil = 50% US trade deficit US imports nearly 50% oil needs Risks

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World’s fastest-growing O&G region Citi , PwC, GSAM on economic impacts of US energy windfall

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  1. World’s fastest-growing O&G region Citi, PwC, GSAM on economic impacts of US energy windfall • GDP effects • +2%-3.3% higher 2020? • Job creation • 2.2/3.6 mln jobs? • Current account deficit/trade balance • Oil = 50% US trade deficit • US imports nearly 50% oil needs • Risks • Export revenues vs input cost advantage • Crude exports politics • Regulatory risk • Fracking • Prices • Oil and gas • Shale • LTO • Deepwater • Into the 2020s? • Mexico & Canada • Reindustrialization • Gas-fired generation • Gas in transport • Space heating • LNG exports • Lowest costs • Petchems • Steel

  2. US energy supply revolution: shale gas production EIA, IEA, 2011 estimates • US shale gas output rose from 20 bcm in 2005 to near 200 bcm in 2010 • Now around 30% of US gas production • Main driver behind the 100 bcmhike in US gas output over past 5 years • Still booming despite gas price drop

  3. US natural gas price advantage • Growing disconnect in gas prices, driven by regional dynamics • North American disconnect due to shale gas revolution • Asian prices still closely connected to oil prices • European prices in the middle, but Europeans benefitted from US shale gas revolution Source: ICE, EIA, IEA, German Customs, Japanese Customs, McCloskey

  4. US energy supply revolution: LTO FSU Americas • N. America supply seen up 4.0 mb/d 2011-17 • 85% of non-OPEC supply growth • Americas replace FSU as non-OPEC growth leader • World supply seen up 9.3 mb/d (860 kb/d annually), after unplanned outages cut growth to 100 kb/d 2011 and 400 kb/d 2012

  5. American century of non-conventional oil Mb/d • US, Canada and Mexico add 4 mb/d 2011-2017 • US adds 3.3 mb/d (led by LTO, NGL) • US LTO + 2.5 mb/d • US LTO roughly half of non-OPEC growth • Canada +1.1 mb/d (oil sands) despite infrastructure constraints • Brazil +0.8 mb/d (deepwater)

  6. US oil price advantage: “broken” benchmarks – crisis or opportunity?

  7. US inland oil cost advantage:lower than low

  8. Homecoming for US manufacturing? • PWC report Sept. 2012: • Slow rebound in US industrial output post-2009 • Still < pre-recession levels • Manufacturing employment rising more slowly • Cyclical recovery versus structural factors • Reshoring production • Transportation (high international prices) • Energy (low domestic prices) • Currency – forex • IP protection – reuniting R&D and production • Labour costs, supply • Supply chain risks • Demand – high living standards • Lower lead times, lower inventory requirements • Talent

  9. Top beneficiaries • Chemicals • Refining • Metals

  10. US petrochemical renaissance • Surging US LPG output from tight-shale supports petrochemical boom • Efficiency gains from fuel switching for ethylene: • Ethane 77.5% average yields; naphtha 30.3% • Ethane lighter 17.2 mt/bbl; naphtha 8.9 mt/bbl • US LPG at deep discounts to naphtha • High-density polyethylene (HDPE) margins twice as high • US input cost 50% below NE Asia (global price setter for ethylene chain) • Global LPG demand growth (+1.9%) outstrips naphtha (+1.1%) 2011-17 on US switch • European & Asian naphtha cracker s under threat

  11. US petrochemical renaissance • 2013-2015: New ethane cracking capacity + de-mothballing • 2016-2017: 3 new world scale petchem projects: • 0.8 mt/y and 1.5 mt/y in Texas (Eagle Ford) • 1mt/y integrated ethane cracker in Marcellus shale basin • Marcellus fractionation gas plant to feed Canadian crackers being revamped + converted to ethane • US naphtha crackers at threat • US oil demand for petrochemicals seen dropping to 1.65 mb/d 2017 from 1.84 mb/d 2011 (-190 kbb/d, or -1.8%) • Propylene, butadiene, butylene production adversely affected • Ethane propylene yields 3.1%; naphtha 16.1% • Propylene production from propane (long uneconomical) to find support? • Propane dehydrogenation (PDH) has become economical in the US • 2 new facilities to be commissioned end-2015 in the US (1 existing)

  12. Revolution in US refining Product exports closing gap on the FSU • US refineries maintain high operating rates due to their competitive advantage • lowest energy cost in global refining – 15% for top US independent vs. 40% UK • Discounted inland crude • Economies of scale • State of the art technology • Regional supplier – Latin America slashes refining budget • US product exports up to > 2.5 mb/d so far in 2012, from 1 mb/d in 2005. • Export value + 60% 2011 y-o-y • Russian exports 2.65 mb/d in same period (FSU 3 mb/d), India 1.2 mb/d) • lndia, China, Middle East raising the stakes?

  13. Transportation sector: gas for transport? Micro-NGL a potential road freight, rail cost saver • Micro LNG for cars, remote indus./resid. locations • GE Oil & Gas announcement January 2012 • 2012 GE Oil & Gas Annual Meeting in Florence launch • 20,000-150,000 t/y per unit • Clean Energy Fuels “America’s Natural Gas Highway” • LNG network of 150+ stations. • 98 stations identified early 2012 • 70 targeted to open by end-2012 in 33 states • Nov 2012-Clean Energy buys 2 GE Micro-LNG plants • To supply Flying Pilot J stations in “America’s Natural Gas Highway” • Each plant to produce 250,000 gln/d , scalable to 1 mlngln/d. • Operational target 2015. • Location? • EV penetration a more distant prospect • Net positive for rail sector? • Less coal freight, more oil freight • Lower fuel costs

  14. Metals • Cost advantage • Nucor opening a new direct-reduced iron (DRI) plant in La. – lower nat. gas costs • US Steel invests >$100 mln in Ohio plant to meet demand from shale gas • PWC: low US nat. gas prices adding 1 mln workers? • Cutting industry gas costs by nearly $12 mln/year through 2025 • But nat. gas imperfect substitute for coking coal • Market demand • Infrastructure needs: • Gas processing • Liquid separation • NGL fractionation • Pipelines • Storage • Midstream MLP boom

  15. Risks to forecast • Political / regulatory • Fracking • Water • Bottlenecks • Resources/ declines • Demand • Carbon price – coal to gas switch • Nuke to gas? • Prices • International prices • domestic prices • Domestic cost advantage vs. exports?

  16. LNG exports? High exports seen unlikely – limited price effect? • 10 applications, only 1 moving forward so far • Conversion of re-gas or new build? • EIA study: “Effect of Increased Natural Gas Exports on Domestic Energy Markets” - January2012 • Only considers link between export levels and domestic gas prices • No consideration of international gas prices and export economics • No study of macroeconomic impacts • New NERA Economic Consulting study (DoE commissioned), 5/12/12 • Strong support for exports • Only limited upward domestic price effects – lower than EIA study • Economic benefits under all scenarios - rising with export levels • Limited downside for employment and average real wage income • Large-scale exports unlikely –in almost all cases below 5-6 bcf/d • US prices remain well below overseas prices despite exports in all cases

  17. Crude exports? Less likely than gas – at least in crude form – but… • Incoming Senate Energy Committee Chairman Ron Wyden (D-OR) not a fan • 6 companies known to have applied for crude export licenses • BP has one but never used it • Shell confirmed it applied • Pressure is building • Exports to Canada allowable • Canada maritime refineries key suppliers to US Northeast • But Canada need outlet for its own light, sweet crude (syncrude) backed out by Bakken • Pressure to expand allowable countries beyond Canada • Granted by Bureau of Industry and Security (Dept of Commerce) • Product exports OK but potential is limited • Refinery runs already in 90% range • New supply not the best match for US refining capacity

  18. Forecasters missed the boat on US shale gas once… could they be wrong again? • Even in a country with a long E&P history, the evolution of unconventional gas production can take many experts by surprise

  19. Uncertainties in US light tight oil forecasting

  20. Thank you antoine.halff@iea.org

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