IEEJ：November 2016 © IEEJ2016

THE US SHALE BOOM
Institute for Energy Economics, JapanOctober 6, 2016
Michael C. Lynch

IEEJ：November 2016 © IEEJ2016

2014 DOE PRICE FORECAST SURVEY$180$160$140$120$100$80$60$40$20$0
1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

IEEJ：November 2016 © IEEJ2016

WHAT WENT WRONG (FOR SOME)?
THE UNEXPECTEDMARCELLUS/UTICA KEPT US PRICES VERY LOWDIFFERENTIALS VERY HIGH IN MARCELLUS/UTICA

WHAT SHOULD HAVE BEEN EXPECTEDOIL PRICES $50 OR SO; NATURAL GAS PRICES UNDER $5/MMBTUGAS RISKIER THAN OIL (NO GASPEC IN NORTH AMERICA)HIGH DEBTS, HIGH RISKSMALL COMPANIESMORE PRODUCTION POTENTIAL THAN PRODUCTION (SAMSON)IRRATIONAL EXUBERANCEASSUME PRICES DO WHAT YOU WANTSPEND MONEY CARELESSLYIEEJ：November 2016 © IEEJ2016“SHALE IS GOOD”
“THE UNCONVENTIONAL RESOURCE PRIZE IS TOO LARGE FOR PRIVATE EQUITYCAPITAL TO IGNORE” (SAMSON DEAL 2012)

“…land acquisition became the key to capturing the greatest values from theunconventional plays” Aubrey McClendon 2011 Forbes

Cheapeake stock price
TOO MUCH MONEYINVESTED WITHOUTDUE DILIGENCE.

IEEJ：November 2016 © IEEJ2016

SUCCESS FROM:HIGH WELL PRODUCTIVITYGOOD LOCATIONSLUCKGOOD GEOLOGISTSGOOD MANAGEMETNGOOD ENGINEERINGREPEATED TESTSEXPERIENCED PEOPLE

FISCAL CAUTION
NOT BUYING AT PEAKNOT ASSUMING HIGH PRICESIEEJ：November 2016 © IEEJ2016

DEBT AND REVENUE ($MIL)
6000

PIONEER
5000

DEBT

4000

3000
2000CABOT

1000001000

2000

3000
REVENUE

400050006000

IEEJ：November 2016 © IEEJ2016NATURAL GAS AND LNG PLANS
161412CHENIERE ENERGY
BEGINS PROMOTINGSABINE PASSREADY FOR IMPORTS

CEO SOUKI
FIRED

1086420FERC FILINGCHENIERE PLANNED IMPORTS WHEN LNG PRICES WERE HIGH.

IEEJ：November 2016 © IEEJ2016

MOST RECENT US GAS PRICE FORECASTS
98762015$/MMBTU

5432101990

1995

2000

2005
ACTUAL

2010

2015

2020

2025

DOE 2014

IHSGI

EVA

ICF

2030
DOE 2015

2035

2040

IEEJ：November 2016 © IEEJ2016

2006 US GAS FORECASTS
9872015$/MMBTU

65432101990

1995

2000
ACTUAL2005DOEGII2010
EEA

2015
PIRADB

2020
SEER

2025

IEEJ：November 2016 © IEEJ2016

GAS PRICE FORECASTS 2001
1210

2015$/MMBTU

864201990

1995

2000
ACTUALDOE

2005
WEFA

2010
GRIDRI2015
AGANPC2020

IEEJ：November 2016 © IEEJ2016

DIVERGING NATURAL GAS PRICES
18.00
16.00
14.00

$/MCF

12.00
10.00
8.00
6.00
4.00
2.00
0.00
1985

1990

1995
JAPAN

2000
GERMAN

2005
US20102015

IEEJ：November 2016 © IEEJ2016

DUAL VIEWS ON BREAKEVEN COSTS
NO ONE MAKING MONEYNO FREE CASH FLOWRECYCLING INVESTMENT CAPITALCOSTS ABOVE PRICESHIGH PROFITSUSUALLY COMPANY VIEWSMIGHT EXCLUDE G&A

PRIMARILY HIGH-GRADINGIEEJ：November 2016 © IEEJ2016

SHALE GAS BREAKEVEN COSTS (PRE2014)
1210864202000

2001

2002

2003

2004

2005
ACTUAL

2006

2007

LOWEST

2008

2009

MEAN/MIDCAST2010

2011

HIGHEST

2012

2013

2014

2015

IEEJ：November 2016 © IEEJ2016

WHY THE MISUNDERSTANDING OF
BREAKEVEN COSTS?
BAD ESTIMATESINCLUDING INTEREST PAYMENTS

ASSUMING HIGH LEASE PAYMENTSHISTORICAL AVERAGE VS CURRENT COSTSSTATIC INSTEAD OF DYNAMIC
NUMEROUS WAYS TO LOWER COSTSRAPIDLY CHANGING TECHNOLOGYCYCLICAL COST BEHAVIORHIGH-GRADINGIEEJ：November 2016 © IEEJ2016

SOURCES OF COST SAVINGS(CONSOL IN UTICA, WELL COST IN $MIL)

EARLY COSTS
Drilling Efficiency
Service Cost
Casing Design
Multi-Well Pad
Completion Design
Proppant Optimization
FINAL

26.2
8.2
2.2
0.4
0.8
1.2
1.1
12.3

IEEJ：November 2016 © IEEJ2016

DRILLED AND UNCOMPLETED OIL WELLSOIL DUCS
1,800
1,600
1,400
1,200
1,000800600400200-BAKKENEAGLE FORDNIOBRARAPERMIANIEEJ：November 2016 © IEEJ2016

DECLINE RATESONE CERTAINTY: VERY HIGHPESSIMISTS CONCLUDE EARLY PEAK, SHARP DECLINEOPTIMISTS SEE POTENTIAL TO OVERCOMEINDIVIDUAL WELLS HIGHLY VARIABLE

LONG-TERM DECLINE UNCERTAINIEEJ：November 2016 © IEEJ2016

PROJECTIONS OFTEN EXCEEDEXPERIENCEIEEJ：November 2016 © IEEJ2016

BIG VARIANCE AMONG WELLSIEEJ：November 2016 © IEEJ2016

EVOLUTION OF MARCELLUS

DECLINE RATE EUR IN BCFe200843.87%
22009
43.21%
3.3
2010
48.52%
4.9
2011
49.02%
4.5
2012
48.38%
4.2
2013
46.22%
5.4SOURCE: SWINDELL 2016.

IP HORIZ LENGTH EUR/FT
1.422800.88
2.42890
1.144.03800
1.29
4.04100
1.104.34500
0.935.84751
1.14

IEEJ：November 2016 © IEEJ2016

EAGLE FORD SHOWS HIGHER 2ND YEARDECLINE RATESSOURCE: EIA BASED ON DRILLINGINFO DATA.

IEEJ：November 2016 © IEEJ2016

BUT INITIAL PRODUCTION RATES ARE
HIGHER
1ST YEAR PROD:
2010: 300 MB
2013: 800 MB

IEEJ：November 2016 © IEEJ2016

NOW WHERE TO:VIEW FROM CABOT 2016
MARCELLUS
52% DROP IN DRILLING COSTS FROM 2012

UPGRADED RIGS, MORE EFFICIENCY, BETTER TERMS WITH SERVICE COS.

LATERALS INCREASED FROM 5200 FT TO 7000 FT IN 2 YEARSPRE-TAX IRR 132% AT C. $2.25/MMBTUIEEJ：November 2016 © IEEJ2016

CHANGE IN GAS PRODUCTION(YEAR ON YEAR, BCFD)
543210-1-2-3BARNETTFAYETTE

EAGLE

HAYNESMARCELLUSUTICAIEEJ：November 2016 © IEEJ2016

CAN SHALE OIL DO THE SAME?
DRILLING DECLINE LED TO PRODUCTION DROPSHALE OIL FLOWS LOWER THAN SHALE GASSHALE OIL STILL LESS MATURE THAN SHALE GASENGINEERING STILL EVOLVINGQUESTION: CAN PERMIAN DO FOR OIL WHAT MARCELLUS DID FOR GAS?

IEEJ：November 2016 © IEEJ2016

EFFECT OF HIGH-GRADINGWell Cost IP
Natural Gas $milmcf/d
Barnett
3.5
1.5
Marcellus
5.7
20Petroleum $milb/d
Bakken5.9425Permian
7.2
1000

IEEJ：November 2016 © IEEJ2016

BREAKEVEN PRICE:
WHEN DOES PRODUCTION RECOVER?

CALCULATIONS C. 2014.

IEEJ：November 2016 © IEEJ2016

BAKKEN RIGS AND PRICE
250200150100500WTI PRICEDRILLING DECLINED AT $50 (WELLHEAD).

RIGSIEEJ：November 2016 © IEEJ2016

DIFFERENCEBAKKEN 30-DAY IP 2011: 125 B/DBAKKEN 30-DAY IP 2015: 425 B/D

PERMIAN 30-DAY IP 2015: 1000 B/D (SOME REPORTS)

PERMIAN INFRASTRUCTURE CHEAPER

PERMIAN TRANSPORT COSTS CHEAPER
BUT BAKKEN COMING DOWNIEEJ：November 2016 © IEEJ2016

PERMIAN NOT YET IN DECLINEDRILLING RECOVERING
60030%

50025%20%

400

15%
300
10%
200

5%

1000%--5%
Jan-08Jan-09Jan-10Jan-11
RIGS

Jan-12

Jan-13Jan-14Jan-15Jan-16PRODUCTION CHANGE Y/YANOTHER 25 RIGS AND PERMIAN SHOULD OFFSET DECLINES ELSEWHEREIEEJ：November 2016 © IEEJ2016

CONCLUSIONSSHALE RESOURCE IS LARGEPOLITICS WILL DETERMINE GLOBAL SPREAD
SUPPLY CURVE VERY FLATINFRASTRUCTURE SECONDARYAVOID SIMPLE ANALYSIS“SHALE IS GOOD”

“PRICES DON’T GO DOWN”

BE OPEN-MINDEDMEASURE TWICE, CUT ONCEContact :report@tky.ieej.or.jp