Future of Oil and Natural Gas Prices

andd Th
Their
i IInterrelationship
t l ti hi
A Longer-Term View Based on EIA’s
Annual Energy Outlook and
International Energy Outlook

Joe Benneche
National Energy Board’s
2010 Energy
gy Futures Conference
March 12, 2010

Internal
RichardBriefing,
Newell, Feb.
SAIS,8,December
2010 14, 2009 1
 Energy Information Administration

• Independent agency within the U.S. Department of

Energy

• Collect and p
post energy
gy data on the U.S. and p
post some
international data (www.eia.doe.gov)

• Project key energy indicators for the U

U.S.
S and
internationally by year through 2035 and for the U.S. by
month for up to 6 quarters

• Perform model sensitivities and analysis of proposed

g in laws and regulations
changes g
HOW MUCH
CAN WE GET
FOR IT?
EIA’s Annual Energy Outlooks include three oil price cases

AEO2009 High Oil Price

$220
AEO2009 Low Oil Price $210
$200 AEO2009 Reference
AEO2010 High Oil Price
$180 AEO2010 Low Oil Price
$160 AEO2010 Reference
ars per Barrrel

$140
$133
$120
2008 Dolla

$100

$80

$60
$51
$40

$20
History Projections
$0
$
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Source: EIA’s Annual Energy Outlook 2009 & 2010

 Oil prices relate to many uncertain factors

OPEC production Global economic

decisions growth

Non-OPEC supply Inventories and

growth weather
Global
Technological
g
Oil Prices Speculation,
p , hedging,
g g,
improvements investment

Exchange
E h rates
t and
d
Geo-political factors
inflation
Spare production and
consumption
ti capacity
it
In the long-term oil prices are driven by four
fundamental factors

EIA’s methodology
gy of developing
p g an oil price
p path:
p

– Estimate world demand for liquid fuels

– Adopt a rule for OPEC market behavior

– Test the reasonableness of non-OPEC conventional

oil “below-ground” and “above-ground” assumptions

– Estimate unconventional liquids production

Growth in economic activity and population drives increased
liquids use in selected regions worldwide
6.5
Population
5.5 GDP per Capita
Energy Use per GDP
4.5 Liquids Consumption
Year

3.5
cent per Y

2.5
1.5
05
0.5
Perc

-0.5
-1.5
i na

ia
US

st
ia
pe

il
n

az
pa

Ea

ss
Ind
ro

Ch

Br
Ja

Ru
-2.5
Eu

le
dd
D

Mi
C

-3.5
OE

Source: US: Published AEO2009 (March 2009); ROW: GDP Assumptions based on IHS Global Insight, Inc.;
Population from UN World Population Prospects (2006 Revision); Liquids Use from IEO2009.
 Unconventional sources provide nearly half of the growth
in global liquid fuel supply between 2006 and 2030

120
History Projections
107
100
.

Total
85
Day

80
Million Barrrels per D

60
48 Non-OPEC Conventional 51

40 42
34
OPEC Conventional
M

20
Unconventional 13
3
0
2000 2005 2010 2015 2020 2025 2030

Source: EIA’s International Energy Outlook 2009

 Estimates of initial-in-place oil resources range from 14
to 24 trillion barrels.

Mid. East Other United Other Total

trillion barrels OPEC OPEC States Non-
OPEC
Conv. Crude and
Conv 26
2.6 26
2.6 09
0.9 29
2.9 90
9.0
Condensate
Natural Gas Plant Liquids 0.3 0.3 0.2 0.4 1.2
Extra Heavy Crude 00
0.0 23
2.3 00
0.0 00
0.0 22
2.2
Bitumen 0.0 0.0 0.0 2.4 2.4
Shale Oil 0.0 0.0 2.1 0.7 2.7
Source Rock 09
0.9 09
0.9 03
0.3 10
1.0 31
3.1
Total Liquids 3.8 6.0 3.4 7.4 20.6

Source: I.H.S. Energy, World Energy Council, USGS, Nehring Associates, EIA analysis
 NOC investment decisions will largely determine the level
of future oil production

1970 2009
Reserves Held by
Russian Companies NOC Reserves
(Equity Access)
NOC Reserves
(Limited Equity Full IOC Access 15%
Access) 8% 12%
1%
85%

SOVIET 14%
Reserves
65%

Full IOC Access NOC Reserves

(Limited Equity Access)

Source: PFC Energy, Oil & Gas Journal, BP Statistical Review

 Liquids “supply curve” (estimated “breakeven” prices)

“breakeven” price (dollars per barrel)

140
Deepwater
120 and ultra
deepwater

100
Coal
Oil to liquids

Arctic
80 shales Gas
CO2 - EOR to
EO Heavy oil liquids
60 OR
and
bitumen

40
Other
Conventional
Already Middle East + Oil
20 Produced North Africa

0
0 1 000
1,000 2 000
2,000 3 000
3,000 4 000
4,000 5 000
5,000 6 000
6,000 7 000
7,000 8 000
8,000 9 000 10,000
9,000 10 000
Resources (billion barrels)

Source: International Energy Agency 12

EIA’s natural gas wellhead price projections do not respond
proportionately to world oil prices

AEO2009 High Oil Price

$10
AEO2009 Low Oil Price
$
$9 AEO2009 Reference $8.94
$8 94
AEO2010 Reference $8.61
$8 $8.09

$7 $7.31
cf
2008 Dolllars per Mc

$6

$5

$4

$3

$2

$1 Projections
History
$0
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Source: EIA’s Annual Energy Outlook 2009 & 2010

 Gas prices relate to many uncertain factors

World oil prices, oil Domestic economic

production activities growth

World natural gas consumer’s alternative

p
fuel options
market Domestic
Gas
Available domestic Prices Inventories and
resources weather

Technology
T h l andd costt Speculation,
S l ti h
hedging,
d i
of production investment
Legislation and
regulation
l ti
 Natural gas prices impact natural gas consumption
significantly more than world oil prices

High Oil Price

10 Reference
Low Oil Price
9
Buildings
8
Industrial
7
Trillion Cubic Feet

6
Electric
5

2
History Projections
1 Alaska
q
Gas-to-Liquids
0
1995 2000 2005 2010 2015 2020 2025 2030

Source: EIA’s Annual Energy Outlook 2009

 Subtracting 2 Tcf from electric consumption makes the
lines easier to see

High Oil Price

10 Reference
Low Oil Price
9
Buildings
8

7 Industrial
Trillion Cubic Feet

5
Electric
4

2
History Projections
1 Alaska
Gas-to-Liquids
Gas to Liquids
0
1995 2000 2005 2010 2015 2020 2025 2030

Source: EIA’s Annual Energy Outlook 2009

 Levelized electricity costs for new power plants drive long-
term consumption projections for electric generators

2020 2030
120
atthour)

100
Incremental
Transmission Costs
s per kilowa

80
Variable Costs,
including fuel
60 Fixed Costs
((2007 mills

40
Capital Costs
20

0
ar

ar
l

l
s

s
d

d
oa

oa
ga

ga
in

in
le

le
C

C
W

W
uc

uc
al

al
ur

ur
N

N
at

at
N

Source: EIA’s Annual Energy Outlook 2009

 Natural gas prices respond to technological improvement
economic growth, and LNG import assumptions

Scenario Scenario factor Average percent change from

Reference Case (Cum Tcf change)
Scenario factor Natural gas
wellhead price
High Economic Total U.S. natural + 2.6% (+22 Tcf) + 4.7%
Growth gas consumption
Low Economic - 3.0% (-25 Tcf) - 7.0%
Growth
Rapid Oil & Gas Rate of oil and + 50% - 4.8%
4 8%
Technology gas E&P
Slow Oil & Gas technological - 50% + 6.0%
Technology improvement

High U.S. LNG Level of LNG + 105% (+48 Tcf) - 9.5%

Imports imports into the
Low U
U.S.
S LNG United States - 62% (-15 Tcf) + 2.0%
2 0%
Imports

Source: EIA’s Annual Energy Outlook 2009

 Estimates for technically recoverable U.S. natural gas
resources are key to projections
(trillion cubic feet as of January 1, 2008)
Proved reserves
238

Inferred nonassociated reserves

596 51 647
Offshore
Onshore
Undiscovered nonassociated
144 233 377 Offshore
Onshore
Unconventional
103 347 449 Shale gas
Coalbed methane
Other unproved
117 291 408 Alaska
L
Lower 48 associated-dissolved
i t d di l d

0 100 200 300 400 500 600 700

Total: 2
2,119
119 trillion cubic feet

Source: EIA’s Annual Energy Outlook 2010

 Natural gas supply will come from varied sources, with
somewhat different market drivers

25

Net Net LNG Alaska

20 Pipeline Imports
Shale gas
et
n cubic fee

15
Coal bed methane

Lower 48 offshore
trillion

10

5 Lower 48 onshore conventional

(including tight gas)

0
2000 2005 2010 2015 2020 2025 2030 2035

Source: EIA’s Annual Energy Outlook 2010

 Higher oil prices influence domestic natural gas
supplies, and therefore prices in various ways
• Upward pressure on natural gas prices
– Increases oil drilling activities, thereby increasing E&P costs for both
oil and gas
gas, as well as directing more resources to oil over gas
– Increases world gas consumption, thereby decreasing domestic LNG
import potential
– Potentially increases natural gas use for Canada oil sands, thereby
decreasing gas exports to the US

• Downward ppressure on natural g gas p

prices
– Increases oil production with associated-dissolved gas production
– Increases return on gas drilling activities which also produce lease
condensate and natural g gas liquids
q
– Increases drilling activities targeted for oil which may result in
increased gas discoveries, particularly in the offshore
– Increases available cash flow for future projects, both oil and gas
Impacts of oil prices on natural gas supply and consumption
are shown on cumulative difference from the Reference Case

20
High Oil Price Low Oil Price
n cubic feet)

Alaska
GTL LNG
10
Imports
NA
erence (trillion

Pipe Imp.
Pi I Other
Offshore
Industrial NA Electric
AD Onshore
0
NA
AD
mulative Diffe

Onshore Electric
Pipe Imp. Industrial
LNG Imp. Other
NA
-10
Offshore
Cum

Alaska

-20
Production Consumption Production Consumption

AD – Associated-dissolved
Source: EIA’s Annual Energy Outlook 2009 NA – Nonassociated (with oil wells)
 Projected oil-to-gas price ratio trends above previous
historical average and shows a broad potential range

AEO2009 High Oil Price

5
AEO2009 Low Oil Price
AEO2009 Reference
alent basis

AEO2010 Reference
4
3.8
n Btu equiva

2.5
Gas Ratio on

2
Oil-to-G

1 1.0

History Projections
0
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Source: EIA’s Annual Energy Outlook 2009 & 2010

Major contributing factors toward closing/widening the
gap between oil and gas prices

• Widening the gap

– Move from oil-price based gas contracts
– Excess liquefaction capacity
– Gas
G shale
h l ddevelopment
l t
– Gas hydrates development?

• Closing the Gap

– Natural g
gas vehicles
– Gas-to-liquids plants
– North American LNG exports
Issues related to natural gas vehicles:

• Definite potential for increased use of LNG/CNG in fleets

with short-distance applications, some long-haul
• Extensive infrastructure costs/risk for adequately
supporting personal vehicle use
• Marketability of personal vehicles limited with added cost
(about $4,500 extra), less storage space, novelty, and
refueling limitations, particularly for long-haul
• Chicken and egg problem of building infrastructure
before vehicles or buying vehicles before infrastructure
• Government incentives possible, sufficient?
• Natural g
gas pproducers mayy have incentive to p promote
 Breakeven prices for gas-to-liquids facilities show potential
economic feasibility, depending on the assumptions

$25
Rate of Return – 12%
P b kP
Payback Period
i d – 10 years A
$20
(overnight capital cost, nominal capacity)
MBtu)

$15 B
Natural Gas Price ($/MM

(4,661 MM$,
($1,700 MM, 34 Mbbl/d)
50 Mbbl/d)
$10
C

$5
(14,835 MM$, 140 Mbbl/d)

$0
N

$0 $50 $100 $150 $200

-$5

-$10
Crude Oil Price ($/BBL)

Source: EIA, RW Beck, Trade Press

Issues related to North American LNG exports:

• North American gas is typically less competitive on a

world market stage.
• The high cost of a liquefaction facility generally demands
high utilization rates to support and long-term
long term
commitments by suppliers and buyers.
• The Pacific market is more likely to yield a higher price,
while most of the potential North American liquefaction
sites are along the Gulf Coast.
• The Kitimat location is probably best positioned for such
an endeavor.
 www.eia.doe.gov

Examples of EIA Periodic Reports

Short-Term Energy Outlook
Outlook, monthly

Annual Energy Outlook 2010, early release, (full release planned March 2010)

International Energy
Energ Outlook
O tlook 2010,
2010 planned May
Ma 2010
December 2008
Examples of EIA Special Analyses
Impacts of a 25-Percent Renewable Electricity Standard as Proposed in the
American Clean Energy and Security Act Discussion Draft, April 2009

Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy
and Security Act of 2009, August 2009

The Relationship Between Crude Oil and Natural Gas Prices, October 2006

Joe Benneche (202-586-6132)

joseph.benneche@eia.doe.gov