IEEJ：October 2019 © IEEJ2019

THE OUTLOOK FOR THE
U.S. SHALE INDUSTRYMICHAEL C. LYNCHOCTOBER 2019

IEEJ：October 2019 © IEEJ2019

THE BOOK IS FINALLY HERE!
(JULY 2016)

Primary lesson is that much knowledge is superficial,and incorrect. In-depth understanding usually trumps clichés.
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IEEJ：October 2019 © IEEJ2019

CAUTIONSHIGH LEVEL VIEW
◦ ANY GIVEN COMPANY MIGHT BE DIFFERENT◦ GEOGRAPHY AS WELL AS GEOLOGYACCOUNTING ALWAYS TRICKY◦ NO EFFORT TO CORRECT◦ AGGREGATIONTOO MUCH SUPERFICIAL THINKING◦ STATIC NOT DYNAMIC3IEEJ：October 2019 © IEEJ2019

PRIMARY TOPICSDECLINE RATESCAPITAL DISCPLINEPERMIAN TAKEAWAYOUTLOOK FOR LNG

4IEEJ：October 2019 © IEEJ2019HISTORY OF CONTROVERSYGEOLOGISTS: HUGE RESOURCE!

◦ ENGINEERS: IMPOSSIBLE TO EXTRACTCOMPANIES: GREAT GEOLOGY!

◦ AS GOOD AS/BETTER THAN THE EAGLE FORD/BAKKEN◦ ANALYSTS: TOO EXPENSIVEPESSIMISTS:◦ ONLY BARNETT◦ OIL WON’T WORK◦ BAKKEN UNIQUE◦ HIGH DECLINE RATES◦ CASH-FLOW IS NEGATIVE◦ SWEET SPOTS INSUFFICIENTE PUR SI MUOVE!

5IEEJ：October 2019 © IEEJ2019

CAPITAL DISCIPLINE:BANKERS VS. DRILLERSSHOW US YOUR CAPITAL DISCIPLINE!
◦ “Please for the love of God, don’t do it!”SURPLUS WEIGHING ON PRICES◦ PERMIAN TAKEAWAY◦ NEGATIVE GAS PRICES, DISCOUNTED CRUDEGROWING DUCSANIMAL SPIRITS VS. IRRATIONAL EXUBERANCE6IEEJ：October 2019 © IEEJ2019

WHAT DRIVES SPENDING?
3503002502001501005001977198219871992

1997

UPSTREAM EXPENDITURES

200220072012

2017

OIL PRICESOURCE: U.S. ENERGY INFORMATION ADMINISTRATION.
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IEEJ：October 2019 © IEEJ2019

PESSIMISM IN SHORT-TERM
IEA FORECAST OF US SUPPLY
25201510502010

2011

2012

2013

2014
ACTUAL20152016
2015

20172016

2018
2017

2019

2020

2018

2019

2021

2022

2023

2024

SOURCE: INTERNATIONAL ENERGY AGENCY OIL MARKET REPORT.
8IEEJ：October 2019 © IEEJ2019

CONTINUING PESSIMISM IN SHALE OIL(EIA FORECASTS)
1210864202010

2015
ACTUAL20122020
2013

2014

SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION

2025
2015

2016

2030
2017

2018

2035
2019

2040
9IEEJ：October 2019 © IEEJ2019

BREAKEVEN CONTROVERSY“NO WELL IS PROFITABLE”◦ “ALL OUR WELLS ARE PROFITABLE”

BREAKEVEN ESTIMATES UNRELIABLE◦ SHORT-RUN NOT LONG-RUN COSTS◦ EXCLUDING G&A, INTEREST?

◦ REALITY BITES◦ MARGINAL COSTS $7.50/MCF (2010)◦ MARGINAL COSTS $3.81-7/MCF (2013)10IEEJ：October 2019 © IEEJ2019

GAS BREAKEVEN AND PRICE$/Mcf
161412$/MCF

1086420$/Mcf

SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION AND THE AUTHOR.

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IEEJ：October 2019 © IEEJ2019

MARGINAL COSTS (SHORT-RUN)

12IEEJ：October 2019 © IEEJ2019

MARGINAL COSTS (LONG-RUN)

13IEEJ：October 2019 © IEEJ2019

DECLINE RATESPRODUCTION DROPS OFF SHARPLY
MUCH FASTER THAN CONVENTIONAL OIL
FOCUS IS ON THE WELL LEVELIMPACT ON OUTPUT MIXEDDRILLING LEVELS NEED TO BE MONITORED CLOSELY

14IEEJ：October 2019 © IEEJ2019

SHALE GAS DECLINE CURVESSOURCE: U.S. ENERGY INFORMATION ADMINISTRATION15

ANADARKO
BAKKENEAGLE FORDNIOBRARA

Sep-19

May-19Jan-19Sep-18May-18Jan-18

Sep-17May-17Jan-17

Sep-16May-16

Jan-16

Sep-15May-15Jan-15

Sep-14May-14Jan-14

Sep-13May-13Jan-13

Sep-12

May-12

Jan-12

Sep-11

May-11

Jan-11

Sep-10May-10Jan-10

Sep-09

May-09

Jan-09Sep-08May-08Jan-08

Sep-07

May-07

Jan-07

IEEJ：October 2019 © IEEJ2019

SHALE OIL DEPLETION RATES(LEGACY / PRODUCTION)

10.00%

9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

PERMIAN16

ANADARKO
BAKKENEAGLE FORDNIOBRARA

Sep-19

May-19Jan-19Sep-18May-18Jan-18

Sep-17May-17Jan-17

Sep-16May-16

Jan-16

Sep-15May-15Jan-15

Sep-14May-14Jan-14

Sep-13May-13Jan-13

Sep-12

May-12

Jan-12

Sep-11

May-11Jan-11

Sep-10May-10Jan-10

Sep-09

May-09

Jan-09Sep-08May-08Jan-08

Sep-07

May-07

Jan-07

IEEJ：October 2019 © IEEJ2019

SHALE OIL PRODUCTION
10,000,000

9,000,000

8,000,000

7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000-PERMIAN

17ANADARKOEAGLE FORDPERMIANSOURCE: U.S. ENERGY INFORMATION ADMINISTRATION AND THE AUTHOR.
Sep-19

May-19Jan-19Sep-18May-18Jan-18

Sep-17May-17Jan-17

Sep-16May-16

Jan-16

Sep-15May-15Jan-15

Sep-14May-14Jan-14

Sep-13May-13Jan-13

Sep-12

May-12

Jan-12

Sep-11

May-11

Jan-11

Sep-10May-10Jan-10

Sep-09

May-09

Jan-09Sep-08May-08Jan-08

Sep-07

May-07

Jan-07

IEEJ：October 2019 © IEEJ2019

SHALE GAS DECLINE RATE(LEGACY / PRODUCTION)

10.00%

9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

APPALACHIA18

IEEJ：October 2019 © IEEJ2019

SHALE GAS PRODUCTION
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000

ANADARKOAPPALACHIAEAGLE FORD

SOURCE: U.S. ENERGY INFORMATION ADMINISTRATIONHAYNESVILLE

Jul-19Feb-19Sep-18

Apr-18

Nov-17

Jun-17Jan-17Aug-16

Mar-16Oct-15May-15

Dec-14Jul-14Feb-14

Sep-13Apr-13

Nov-12

Jun-12

Jan-12

Aug-11Mar-11

Oct-10May-10

Dec-09Jul-09Feb-09Sep-08Apr-08Nov-07

Jun-07

Jan-07-PERMIAN

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IEEJ：October 2019 © IEEJ2019

CAPITAL DISCIPLINE (OR NOT)EARLY BOOM YEARSCASH FLOW NEGATIVE/NO PROFITSIRRATIONAL EXUBERANCE◦ WALL STREET THE ENABLER◦ LOTS OF DUMB MONEY

20IEEJ：October 2019 © IEEJ2019

WINNER’S CURSEAPPLIED TO UNCERTAINTY◦ GEOLOGICAL◦ PRICEFORMER A MAJOR FACTOR IN EARLY SHALE DAYS
◦ LATTER THE ENTIRE INDUSTRY◦ PHILOSOPHER BjM: “THIS TIME FOR SURE!”

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IEEJ：October 2019 © IEEJ2019

DOE 2014 PRICE SURVEY180160140120100806040200201020152020
ACTUAL

DOE

2025
系列3系列42030
系列5系列62035
IEA

2040

SEER

SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION, ANNUAL ENERGY OUTLOOK 2014.

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IEEJ：October 2019 © IEEJ2019

BIG FAILSSAMSON: HAYNESVILLE EMPHASISCHESAPEAKE: AGGRESSIVE LEASE ACQUISITIONMANY OTHERSCOMMON ELEMENTS◦ NATURAL GAS HEAVY◦ UNEXPECTED PRICE DROP◦ HEAVY DEBT/EQUITY23

IEEJ：October 2019 © IEEJ2019

GAS PRICES$16.00$14.00$12.00$10.00

SAMSON DEAL CLOSES

$8.00
$6.00
$4.00
$2.00
$0.00

SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION24

IEEJ：October 2019 © IEEJ2019…SORT OF OBVIOUS

SOURCE: CHESAPEAKE ENERGY ANNUAL REPORT 2011.
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IEEJ：October 2019 © IEEJ2019

EMPHASIS ON FUTURE REVENUE
9000
8000
7000
6000
5000
4000
3000
2000
100002008

200920102011

2012

PROVEDUNPROVED

2013

2014

2015

SOURCE: CHESAPEAKE ENERGY ANNUAL REPORTS.
26IEEJ：October 2019 © IEEJ2019

LOSSES CONCENTRATED IN 2015/2016$10,000$5,000$02014201520162017

2018-$5,000-$10,000-$15,000-$20,000-$25,000-$30,000

SOURCE: VARIOUS COMPANY ANNUAL REPORTS
27IEEJ：October 2019 © IEEJ2019

DEBT/EQUITY RATIOS IMPROVED
25201510501234567891011121314151617181920-52014 FAILURESCURRENT PRODUCERS

SOURCE: COMPANY ANNUAL REPORTS
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IEEJ：October 2019 © IEEJ2019

COULD IT REPEAT?
REPEATING THE 2008 COLLAPSE WOULD MEAN:◦ DROP OF 60% IN GAS: TO $1.20/$1.50?
◦ DROP OF 40% IN OIL: TO $35?

REPEATING THE 2015 COLLAPSE WOULD MEAN:◦ DROP OF 45% IN GAS: TO $1.60?
◦ DROP OF 48% IN OIL: TO $32?

OTHER CONCERNS◦ SHARP INTEREST RATE RISE
◦ FLARING BAN29IEEJ：October 2019 © IEEJ2019SHARP RISE IN PERMIAN TAKEAWAY
TRANSPORT COSTS SHOULD DROP
MORE REVENUE FOR PRODUCERSSHOULD MEAN MORE DRILLINGWILL DUCS BE COMPLETED RAPIDLY?
COULD BRENT/WTI DIFFERENTIAL DROP?
MORE NATURAL GAS TO BE FLARED?
◦ OR LARGER PRICE DISCOUNT◦ GOOD FOR LNG EXPORTS

30IEEJ：October 2019 © IEEJ2019

PERMIAN TAKEAWAY GROWS31IEEJ：October 2019 © IEEJ2019

WTI DISCOUNT(API 40+MINUS 20-)151050-5-10-15-20-2532

IEEJ：October 2019 © IEEJ2019

DUCS BY BASIN
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
Jan-14Jul-14ANADARKO

Jan-15

Jul-15APPALACHIA

Jan-16
BAKKENJul-16
EAGLE FORD

SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION

Jan-17

Jul-17

HAYNESVILLE

Jan-18NIOBRARA

Jul-18Jan-19PERMIAN33IEEJ：October 2019 © IEEJ2019

TIGHT OIL YEAR ON YEAR CHANGE
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000

Jul-19Jan-19Jul-18Jan-18

Jul-17Jan-17

Jul-16

Jan-16

Jul-15Jan-15

Jul-14Jan-14Jul-13Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10Jan-10Jul-09

Jan-09Jul-08(200,000)

Jan-08-(400,000)(600,000)34
ANADARKOBAKKENEAGLE FORDNIOBRARAPERMIAN

Source: DOE.

ANADARKO
BAKKENEAGLE FORDNIOBRARA

Jul-19

May-19Mar-19Jan-19

Nov-18

Sep-18

Jul-18May-18Mar-18Jan-18

Nov-17

Sep-17

Jul-17May-17Mar-17Jan-17

Nov-16

Sep-16

Jul-16May-16

Mar-16Jan-16

Nov-15

Sep-15

Jul-15May-15Mar-15Jan-15

Nov-14

Sep-14Jul-14May-14Mar-14Jan-14

IEEJ：October 2019 © IEEJ2019

BASIN PRODUCTIVITY(B/D/WELL ADDED)

1400.00

1200.00

1000.00

800.00600.00400.00200.000.00

PERMIAN35

IEEJ：October 2019 © IEEJ2019

WHY IS SHALE DIFFERENT?
GEOLOGICAL AND POLITCAL RISKS SMALL◦ OUTSIDE OF NEW YORK (COLORADO)

PRICE RISKS HIGH
◦ TAXES AS SHARE OF PRICE SMALLERQUICK MONEY◦ CASH IN ON PRICE SPIKES? MOSTLY OIL.

36

IEEJ：October 2019 © IEEJ2019

SHALE REVOLUTION AND LNG MARKETTWO BIG DIFFERENCES◦ HIGH COST FEED GAS◦ ANIMAL SPIRITSWILLINGNESS TO BE FLEXIBLE◦ BUILD WITHOUT COMMITTED PURCHASES◦ NEW CONTRACT STRUCTURES◦ NO OIL PRICE INDEXING◦ DESTINATION RESTRICTIONSRESULT: LOWER PRICES, LESS UPSTREAM PROFITSBUT MAYBE IRRATIONAL EXUBERANCE?

37

IEEJ：October 2019 © IEEJ2019

GLOBAL GAS PRICES 2018$/MMBTU$25.00$20.00$15.00$10.00

$5.00

$0.00
1985

1987

1989

1991

1993

JAPAN1995

1997

GERMANY1999

2001

2003

US HENRY HUB

2005

2007

CRUDE OIL

20092011

2013

ALBERTASee: “Uncertainties Threaten Natgas Development,” Oil & Gas Journal, 3/4/13.

2015

2017

IEEJ：October 2019 © IEEJ2019

EXPECTATIONSSHALE PRODUCTION TO BE ROBUST◦ INCREASINGLY DOMINATED BY LARGER PLAYERS◦ 2020 SURGE COULD PRESSURE MARKETSBOOM AND BUST CONTINUE◦ SMALLEST AND MOST VULNERABLE DISAPPEARUNCERTAINTY REIGNS◦ NEW BASINS TOUTED AND DECRIED◦ RATE OF TECHNOLOGICAL PROGRESS UNCLEAR

contact :report@tky.ieej.or.jp

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