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University of Calgary
ECON 323
Ronald Schlenker

Mustafa Saeed ECON323 NATURAL GAS MARKETS Introduction 1. Hydrocarbons a. Class of organic compound of C or H 2. Petroleum a. General term for gaseous(natural gas) or liquids(crude oil) hydrocarbons 3. Compounds of natural gas a. Methane(CH4) i. Largest compound ii. Main use is as a fuel iii. Also a petrochemical/fertilizer feedstock b. Natural Gas Liquids(NGLs) i. Ethane(C2H4) 1. 2 largest compound 2. Petrochemical ii. Propane 1. Fuel/petrochemical feedstock iii. Butane 1. Fuel/petrochemical feedstock iv. Pentane-plus 1. Key diluent for oil sands production in Alberta v. Ethane/butane/propane 1. All can be left in gas streams and sold as gas (on heat equivalent basis), more value if upgraded (see table 1.) 2. Pentane plus usually removed at gas plants for value or pipeline operation reasons c. Other compounds i. Hydrogen sulphide(H2S) 1. If present in gassour gas 2. Usually removed fir safety, operation and environmental reasons ii. Carbon dioxide iii. Nitrogen iv. Helium 4. Natural gas prices a. Trading hubs i. Are with multiple pipeline interconnections and/or access to natural gas storage facilities which allows many trading options for buyers and sellers 1. Producing hubs a. NYMEX Henry Hub in Louisiana b. AECO is near Suffield, AB 2. Market hubs a. NYMEX, AECO, CHI, NY, etc. b. Netback price i. Market minus transportation costs Mustafa Saeed ECON323 NATURAL GAS MARKETS 1. In a fully intergraded competitive market price of gas in different regions should only differ by transportation costs a. SEE PICTURE 1 c. Aeco V Henry Hub prices (fig. 1, table. 2) i. Transportation cost from HH CHI > AECO  CHI ii. Netback is lower @ AECO d. Recent price trends i. Lower prices in 90s ($1-3) ii. Much higher prices in 200-2007($4-9) iii. w/ financial crisis in 2008 and shale gas production increasing recently, prices lower (@2-4) e. Consumer prices i. Delivery cost can make up a substantial part of residential prices f. GAS. OIL PRICES i. OIL PRICE HISTORY 1. 1930s –early 70s a. Low stable prices ($1-3) 2. 1973 a. Arab/Israeli war triggered price shock ($3-12) 3. 1979 a. Iranian revolution (2 big spike) ($20-40) 4. 1986 a. OPEC discipline destroyed i. ($35-9) 5. 2000s a. Rising Asian demand drove prices up ($150) 6. 2008 a. Down again ($35) 7. Present ($80) ii. Gas generally worth less than oil on heat equivalent basis 1. The avg is 50-60% less, but now it’s down to 15% less 5. Resources and resource concepts a. Original in place i. The gas volume of hydrocarbons initially in reservoirs before production and without contest to which volumes will be recovered b. Proven reserves i. Reserves recoverable under current technologies and present anticipated economic conditions, specifically demonstrated by drilling, tested or production c. Probable reserves i. Portion of resources contingent with proven reserves that are interpreted with reasonable certainty d. Initial established reserves (IER) i. Proven + probable, or half probable or other e. Remaining established reserves (RER) Mustafa Saeed ECON323 NATURAL GAS MARKETS i. IER – cumulative production ii. SEE PICTURE 2 f. Future additions to existing pools i. Future enhanced recovery from existing discovered pools mainly oil ii. Extension of reserves estimate with new info g. Discovered recoverable resources (DRR) i. IER+ future additions h. Undiscovered recoverable resources i. Resources estimated to be recoverable based on available geological/geophysical evidence but has not yet proven to exit by drilling, production or testing i. Ultimate potential i. All resources that may become recoverable having regard for prospects and anticipated technology j. Recent estimate (TBL 4) i. About 70% of gas is recoverable vs. 28% for oil and 12 % for bitumen 6. Categories of natural gas a. Raw gas i. Mixture of methane’s NGLS H2S CO2, etc. b. Marketable gas i. Mixture of mainly methane originated from processing of raw gas that meets specific us as a fuel or industrial raw material c. Solution gas i. gas that is dissolved in crude oil under reservoir conditions and emerges as a result in pressure and temperature change d. Associated gas i. Gas in a free state in crude oil under reservoir conditions and also in communication with crude oil e. No associated Gas i. Gas that is not in communication with crude oil at initial reservoir conditions f. Sweet gas i. Gas with less than 0.1% H2S g. Sour gas i. Gas with more than 0.1% H2s h. Unconventional gas i. Coal bed methane 1. Methane found in the rock seams ii. Shale gas 1. Methane absorbed into the surface area of shale iii. Gas hydrates 1. Methane trapped and enclosed by ice molecules’ forms beneath permafrost or ocean bottoms OVERVIEW OF WORLD GAS MARKET Mustafa Saeed ECON323 NATURAL GAS MARKETS 1. Global reserves- TBL 6 a. By region i. 39% from the middle eat ii. 38% from Europe/Euroasia b. By country i. Russia 22% ii. Iran 16% iii. Qatar 12% iv. Turkmenistan 11% v. USA 4% vi. (18. Canada) 1% c. OVERTIME i. In the last 20 years remaining reservoirs grown by 150% 2. GLOBAL PRODUCTION  see table 7 a. Production and reservoirs are very different b. By regions i. Europe/Euroasia 32% ii. North America 26% c. By country i. USA 20.2% ii. Russia 18.8% iii. Canada 5% iv. Iran 5% v. Qatar 5% d. OVER TIME i. World gas production tripled in 40years 1. Average 2-3% 2. Highest growth rates seen recently in the middle east e. Reserve to production ratio i. Globally 63 years ii. North America 12 years iii. Middle-east 166 years 3. Consumption (table 9) a. By regions- pattern largely by region matches that for production i. Europe/Euroasia 34% ii. North America 27% b. By country i. USA 21% ii. Russia 13% iii. (6.) Canada 6% iv. Proximity of production climate, economic activities c. Per capita Consumption i. Highest in Canada US Saudi Turkmenistan Ubzermenstan and Netherlands 4. Global gas trade Mustafa Saeed ECON323 NATURAL GAS MARKETS a. In 2011 only 36 TCF of 116 TcF of gas produced was exported (~30%) b. Roughly 70% of exported gas was pipelined, 30% liquefied Natural gas c. Leading exporters (table 10) i. Russia 22% ii. Qatar 12% iii. Norway 10% iv. Canada 9%  all our export goes to the USA v. Algeria 5% d. Leading importers i. Japan 10% ii. USA 10% iii. Germany 8% iv. Italy 7% v. UK 5% Typically prices for natural gas liquids stayed between $2 globally. Since 08 huge discrepancies though, epically in high demand in Japan. Canadian Gas History  1959/30: gas discovered in New Brunswick and Ontario  1883: gas discovered in medicine hat  1885: Bunsen burner invented  1890: Gas used for cooking heating and lighting in medicine hat  1894: Well drilled in Athabasca, northeast Alberta o Searching for oil; found gas instead, blowout for 21 years  1904: Gas discovered in suffered  1909: Gas discovered in bow island (SE AB)  1912: 270km pipeline built from Bow Island to Calgary  1923: 130km pipeline build from Viking to Edmonton  1924: Second major find at Turner Valley o One well flowed 600 barrels a day of naphtha and 21 mmcf/d of gas o Gas was flared o First plant to scrub H2S from natural gas build in Turner Valle  1938: Alberta government bring in oil and gas conservation act- creates energy resources conservation board  1941: gas pipeline subject to utilities act- regulated  1944: gas discovered at Jumping road; west of Calgary  1947: oil discovered at Leduc, south Edmonton this set of a BOOM  1951: ECRB given author over gas removed permits from Alberta o stll now at to pass the ‘surplus test’  1952: 1 sulphur extraction plant completed by shell at Jumping round  1954: Alberta government sets up Alberta gas truck line which eventually NOVA,TCPL Alberta as monopoly over long distance das transmission in province Mustafa Saeed ECON323 NATURAL GAS MARKETS  1957: West coast pipeline connecting northeast BC and northwest AB to lower mainland BS and US pacific NW stared up  1958: TransCanada pipelines limited connected AB to Ontario starts up  1959: National energy board(NEB) formed by federal government  1961: Alberta government instituted air quality standard including limits on H2s and So2 emission  1962: Gas shipments commerce between Alberta and California  1964: First straddle plant built at empress  1965: Great lakes gas transmission start up  1972: Gas discovered in Mackenzie delta northwest territories and offshore Nova Scotia  1973: First extensive federal intervention causes prices controls on gas and oil  1973: Methanol plant build at medicine gat o Alberta government support for ethane based petrochemical industry  Used the infant industry support  1979: First ethane plant at Joffre, near Red Deer commences  1980s: National energy board (NEB) o Introduced by federal government o Price controls, revenue taxes etc.  1982: major declines in exploration, development activity in Western Canadian Sedimentary basins (WCSB)  1985: Western Accord signed between federal and provincial government end of NEP and beginning deregulation  1986: gas discovered at carline Alberta  2000 Alliance pipe line connecting NEBC/NWAB to Chicago starts up Origins of Natural gas 1. Formation of oil and gas a. Abiogene i. Hydrocarbon were trapped inside the earth as it was formed ii. Problem: pre pondence of hydrocarbons in sedimentary rock. b. Biogenic i. Organic material was deposited in sediments which became??? ii. As depth of burial increased heat and pressure transforms organic matter to hydrocarbons c. Coal i. Derived from land plants d. Oil i. Derived from marine plants and animals e. Natural Gas i. Derived from land/marine matter subject to higher temperature pressure than coal/oil Mustafa Saeed ECON323 NATURAL GAS MARKETS f. Once oil or gas is formed pressure forces hydrocarbons through permeable rock layers until its trapped in a porous sedimentary rock like stand stone and limestone g. Broad categories of traps i. Structural 1. Results from faulting and folding of rock ii. Strataphraphic 1. Changes in permeability of neighbouring rock a. Geological time scale ERA PERIOD AGE Cenotic Now 0 Quartry 1.8 Tertiary 6.5 Mesozoic Cretaceous 136 Jurassic 195 Triassic 225 Paleozoic Permian 280 Missipiian 345 Devonian 395 Cambrian 570 b. Oil and gas in Alberta found through the Mesozoic and Paleozoic source rock c. Cretaceous rock and Mississippian/Devonian limestones are prolific i. Ex/ Gas reserves in Alberta IER RER Cretaceous 58 70 Devonian 18 12 Mississippian 18 12 OWNERSHIP OF RESOURCES 1. Surface rights  rights to work on land surface  surface access agreements negotiated with land owners  usually separate from mineral rights 2. mineral rights  to explore and produces resources below the surface  mineral rights are usually held by i. provincial governments referred to as Crown Mustafa Saeed ECON323 NATURAL GAS MARKETS ii. first nations bands iii. freeholders 3. Canadian mineral rights history  1670: King of England granted all mineral and surface rights to Hudson bay company for all lands draining into Hudson bay  1867: Dominion of Canada formed (Ontario Quebec nova scotia new Brunswick) each Provence’s retained ownership of onshore resources  1869: HBC made deal with dominion of Canada and retained half of the land surveyed and settled over the next 50 years in southern prairies 36 26 8 1 i. HBC received about 20,000sq/km in patchwork throughout western Canada 1. Now about 8000sq/km of this belongs to Apache ii. Crown held 95% of surface and mineral rights in south prairies and all rights in unsettled areas  1881: Canadian pacific railway i. Granted 100,000sq/km as a part of a deal to build railway 1. EnCana/cenovous retains about 44,000sq/km of this land today  1887: Crown would in future retain mineral right in NWT previously settlers retained these rights i. Greater amounts of freeholder land in Manitoba (75%) 1. Vs. Sask 20% and AB 10%  1930: Rights transferred from dominion to provinces  Alberta Sask and Manitoba. i. Dominion retained rights for all territories and Hudson bay  1985/6: Accords signed between federal and provinces of NFLD/NS regarding revenue sharing and management of resources Exploration and development activity 1. Mineral rights and land acquisition a) Government have crown land sales where companies can make bids on mineral rights b) Companies make economic calculations of projected revenue and cost to establish a reasonable bid for the land or bonus payments c) Companies can negotiate directly with freeholders land owners d) Alberta: about 90% of related expenditure go to crown, about 10% to freehold land owners e) In the frontier, the north of the shore, development plans are also sometimes submitted to the governments f) When oil or gas is produced land owners also receive royalty Mustafa Saeed ECON323 NATURAL GAS MARKETS 2. Geological and Geophysical Activity a) Geological information is obtained via i. Land surface surveys ii. Analysis of magnetic fields and gravity radiation iii. Main geophysical activity is the seismic survey 1. This transmits acoustic energy into earth and records the energy reflected back as seismic waves from the subsurface geological boundaries 2. 2D: lines of receives yield cross-sectional view 3. 3D : grid of receivers yield 3D image 4. 4D: 3D over time iv. Each of these steps gets progressively much more expensive 3. Drilling a) Well site preparation b) Rig set up c) Drill case and cement surface hole d) Drill main hole e) Test and evaluate perspective producing formations i. Well-site geologist monitor formations 1. Core samples sometimes taken 2. Wire logging a. Gets information about zone thickness, porosity, permeably and frontal fluid composition 3. Drill steam testing a. Isolated zone and sample fluids and flow rates and pressure f) Abandon or case well i. Compare expected revenue to yet to be incurred costs 1. If well is dry well head is cemented and reclamation of site commences 2. If well is a potential producer initial production casing(pipe_ and cement in its prime 4. Complication a) Preformation i. Shoot hole through casing and into producing formation b) Stimulation i. Increasing permeability of producing form 1. fracturing 2. ??? a. Dissolve some rock away 5. Field equipment and facet insulation a) Well site facilities i. Wellhead ii. Pump jacks and compressors b) Flow lines and fathering lines c) Gas plans Mustafa Saeed ECON323 NATURAL GAS MARKETS i. Facilities that process natural gas included equipment that removes 1. Water 2. Carbon dioxide 3. Sulphur 4. Natural gas liquids 6. Exploration and development (E&D) expenditures a) Recent data in Alberta and Canada (table 12) i. Between $20-30 billion/year in AB ii. Between $35-40 billion/year in Canada iii. For Alberta conventional E&D in recent years 1. Represented 20-40% of investment 2. Roughly 10% of GDP in the provinces iv. Since the 1970s roughly 2/3 of conventional E&D spending in Canada has been in Alberta b) Trends Overtime(FIG3) i. E&D spending increased rapidly about 1997 Leduc discovery ii. Steady between $2-4b/day for about 20years iii. Oil and gas prices increased in 1970s spurred enormous growth through 1980s iv. NEP/price collapse lowered spending v. Expanding markets, depletion of reserves and higher prices made for record spending year after ?? from 1997-2006 vi. High prices, financial crisis, and shale gas lowering prices have reduced recent activity c) Exploration vs. development spending i. As a basin matures propotion of E&D spending, that is development increases 1. Ex/ 40s and 50s  40% on development while in 2000s 70% d) Trends in component of E&D spending (FIG 4 & 5) 1. Geophsucal and land shares decrease overtime as more info is gained more land is brought up 2. Exploration drilling now dominate part of exploration drilling 3. Development drilling and field equipment dominate development spending e) Trends in oil vs. gas (FIG 6) i. Fluctuation between oil and gas over years and market access relative prices factors ii. 80% of wells were gas directed in 2000s iii. Since 2009 rapid drop off in gas wells, iv. Now less than 40 given low gas prices  Sometimes units cost go down in price environments  Large revenue cost difficulties from 1979-1986, 2008 corresponds with high activity levels Production and operating activity 1. Operating costs a) Costs associated with operating wells gather systems and gas plants/oil batteries Mustafa Saeed ECON323 NATURAL GAS MARKETS b) Recent data for Alberta $/mcf 2005 2010 Operating Costs 1.05 2.23 E&D Costs 3.2 4.72 c) For conventional oil and as operating costs relatively small compared to E&D d) Real unit operating costs tends to increase overtime as a basin matures (fig. 10) e) When real prices are steady/falling real unit operating costs often falls i. Companies become more creative ii. Companies will shut down high costs well 2. Royalties a) Usually cr
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