US Natural Gas Market Deep-Dive
21st October 2014 1
2
Gas-rich shale is the source rock for many natural gas resources. Horizontal drilling and hydraulic fracturing have made shale gas an economically viable alternative to conventional gas resources.
Conventional gas accumulations occur when gas migrates from gas-rich shale into an overlying sandstone formation. Associated gas accumulates in conjunction with oil.
Tight sand gas accumulations occur in a variety of geologic settings where gas migrates from a source rock into a sandstone formation
Coalbed methane does not migrate from shale, but is generated during the transformation of organic material to coal.
Sources of Natural Gas in the US
INTERNAL 3
Shale Gas/Oil is not new – Technology to
exploit is…. Source: New York Herald 1959
October 30,
2014 INTERNAL 4
Mitchell Energy 1980-90
1947 2009
Innovation, Innovation, Innovation
Mitchell began poking in shale in the early '80s, in a picked-over spot in east Texas called the Barnett Shale.
Shale is dense, tight rock that traps hydrocarbons inside.
"I've had a lot of engineers and geologists say, you're wasting your money, Mitchell," Mitchell says.
One worker suggested a budget frac, of mostly water instead of an expensive gel-based fluid. That raised
eyebrows.
Of course it did take 17 years to get there, not exactly your overnight wonder.
Source Marketplace – NPR: http://www.marketplace.org/topics/sustainability/oil-man-who-figured-out-fracking
Surface Casing
Surface Casing
Cement
Production Casing
Production Casing
Cement
Production Tubing
Marcellus Shale ~ 1.3 miles
below impermeable rock
Horizontal Drilling and Hydraulic Fracturing
~1.3 miles
Source: Chesapeake
All chemicals are disclosed on FracFocus.org on a well-by-well basis
Other: 0.5%
Acid
Friction Reducer
Surfactant
Gelling Agent
Scale Inhibitor
pH Adjusting Agent
Breaker
Crosslinker
Iron Control
Corrosion Inhibitor
Antibacterial Agent
Clay Stabilizer
Water and Sand: 99.5%
Composition of the Fracture Stimulation Mix
visit www.hydraulicfracturing.com
The chemicals used in fracking are standard chemicals employed in a number of household
products
October 30,
2014 INTERNAL 7
Current Lower 48 States (US) unconventional
gas Hot Spots Technically Recoverable
Resources of Key Shales
Top nine shale plays contain 65% of total US shale resources
US Shale Gas Resources US Natural Gas Technically Recoverable Resources ca. 2500 tcf
Resource Estimates: EIA Report ‚‘Review of Emerging U.S. Shale gas & Oil Plays‘ performed by INTEK Inc.,
Released on July 2011, Adjusted based new USGC findings
1
2
3
5
6
7
8
9
1
2
3
4
5
8
7
6
9
4
WV
PA
OK
LA
OH
TX
NM
AR
WY
MT
CO
MI
KY
ND
KS
NY
VA
UT
IL
Antrim
Eagle Ford
Mancos
Woodford
Fayetteville
Barnett-
Woodford
Barnett
Haynesville
Marcellus
tcf
20
20
21
22
32
32
43
74
140
Estimates: Total Shale Gas Reserves ca. 850 tcf; Total Technically Recoverable Shale Gas Resources ca. 550 tcf
Source of the Map: US Department of Energy
Natural Gas Supply/Demand Balances Source: EIA Outlook 2013
8 CONFIDENTIAL 6/12/2012
There is enough supply to cover increased demand – supply elasticity
Today > 40% of natural gas supply coming from shale
tcf tcf
Oil/Gas
Decoupled
As a result of the supply surplus, natural gas prices in USA have decoupled from oil prices
0
5
10
15
20
25
2000 2002 2004 2006 2008 2010 2012E
$/mmBTU
Brent
NG
Henry Hub
NG
NWE
9
Oil/Gas
Coupled
Shale Gas
in USA
History of Oil & Natural Gas Prices Shale Gas drives lower natural gas prices in USA
Total U.S. NGL Supplies from Natural Gas
Will Continue to Rise Rapidly
Total NGL supply from natural gas are
expected to increase by almost 60% between
2012 and 2030.
The largest impact will be on ethane supply
which will rise by over 850 M BPD (90%).
Propane production will rise by over 345 M
BPD (50%).
Total butane production will increase by
around 170 M BPD (45%).
Natural gasoline production will also increase
by around 140 M BPD (45%).
October 30,
2014 INTERNAL 10 Source: IHS-Pervin&Gertz
Increase of supply of NGLs associated with shale gas will create opportunities for the
chemical industry
October 30,
2014 INTERNAL 11
Petrochemical Value Chains
Steam Cracker
Ethylene (C2)
Propylene (C3)
C4 mixture
Refinery
Benzene
Toluene
Xylene
Natu
ral G
as
C
rud
e O
il
C1 Reformer
Syngas
Methanol
Ammonia
Acteylene
Acrylic Acid
Oxo Products
Acrylonitrile
Ethylene Oxide,
Ethanolamines
Vinyl Acetate
Formaldehyde
Acetic Acid
MMA
Butadiene
Raff 1&2, Isobutylene
BDO, THF &
PTHF
Aromatics
Nitric Acid
Caprolactam
Acrylonitrile
Sat Gas Plant
NGL Extraction
Naphtha
Ethane
Propane
Butane
Reformer
C2,3,4 & 6 Value Chains
Cracker Feeds
Value Chain
C1 Value Chain
Highly Favored
Highly unfavored
New Challenges
C1 Value Chain
12
North America Industry Projects Overview
Methanol Overview
Company Location Capacity (ktons) Start-up date
G2X Energy Pampa, TX 65 2014
Methanex (1st) Geismar, LA 1,000 2015
Celanese / Mitsui Clear Lake, TX 1,300 2015
Methanex (2nd) Geismar, LA 1,000 2016
Valero St. Charles, LA 1,600 2016
LCCE* Energy Lake Charles, LA 1,000 2016
S. Louisana MeOH St. James, LA 1,800 2016-17
Koch TX 1,000 2017
Methanex Medicine Hat, Alberta 1,300 2018
OCI Beaumont, TX 1,750 2016
Northwest Innovation Works Oregon & Washington 1,600 (x2) 2018
* LCCE: Lake Charles Clean Energy – project of Leucadia Energy INTERNAL
(cont. next page)
North America Industry Projects Overview
Methanol Overview (cont.)
Company Location Capacity (ktons) Start-up date
Yuhuang Chemical St. James, LA 1,700 2018
Zeogas tbd USA 1,650 tbd
Total ~15,000
INTERNAL
Very dynamic situation with new announcements nearly on a weekly basis
Chinese producers interested in MeOH to export to China for MTO processes
Will USA become an exporter of MeOH in the future?
North America Industry Projects Overview
Ammonia Overview
Company Location Capacity (ktons) Start-up date
OCI Iowa Fertilizer Co Wever, IA 750 2015
Dyno Nobel Waggaman, LA 725 2016
CF Industries Donaldson, LA 1,100 2016
CF Industries Port Neal, IA 725 2016
Ohio Valley Resources Rockport, IN 800 2017
Koch / Invista Victoria, TX 400 2017
Dakota Gas Co. ND 250 2017
BASF / Yara Freeport, TX 800 2018
Agrium Borger, TX 120 2016
CHS Inc Spiritwood, ND 725 2017
Eurochem Iberville, LA 800 2018
Northern Plains Nitrogen Grand Forks, ND 660 2016
Yara Belle Plains Balleplaine, Canada 750 2016
(cont. next page) INTERNAL
North America Industry Projects Overview
Ammonia Overview (cont.)
Company Location Capacity (ktons) Start-up date
Iffco Canada Quebec, Canada 725 2016
Agrium Redwater, Canada 120 2016
LSB Industries El Dorado, AR 450 2016
JR Simplot Rock Springs, WY 200 2016
Summit Power Group Odessa, TX 400 2017
North Dakota Corn Growers ND 660 2017
Farmers of NA Fertilizer Limited Part. Belle Plaine, Canada 875 2017
SCS Energy Bakersfield, CA 460 2018
Magnolia Nitrogen Idaho American Falls, ID tbd tbd
Total ~12,000
INTERNAL
Increased ammonia production will decrease dependence on imports to NA.
C2 Value Chain
17
North America Industry Projects Overview
Ethylene Overview
Company Location Capacity (ktons) Start-up date
LyondellBasell Channelview, TX 230 2014
Williams Geismar, LA 300 2014
Westlake Lake Charles, LA 110 2015
Braskem / Idesa (JV) Veracruz, Mexico 1,000 2015-16
LyondellBasell Corpus Christi, TX 800 2015-16
ExxonMobil Baytown, TX 750-1,500* 2016-17
Formosa Point Comfort, TX 800 2016-17
Chevron Phillips Chem. Cedar Bayou, TX 1,500* 2017-18
Dow Chemical Freeport, TX 1,500* 2018
Sasol Lake Charles, LA 1,400* 2017
OxyChem / Mexichem Ingleside, TX 500 2017
Shell Monaca, PA 1,500* 2019
Aither / Bayer Montgomery, WV tbd 2017
Indorama / partner Not disclosed 1,300* 2018
INEOS Lake Charles, LA 1,360* 2018
(cont. next page)
INTERNAL
North America Industry Projects Overview
Ethylene Overview (cont.)
Company Location Capacity (ktons) Start-up date
Odebrecht/Braskem Washington, WV 1,500* 2018
Axiall / Lotte Chemical LA (tbd) tbd 2018
Formosa LA (tbd) 1,200 tbd
Total ~15,600
INTERNAL
Steam Cracker Yields
0%
20%
40%
60%
80%
100%
Ethan
e
Propa
ne
n-But
ane
Natu
ral G
asolin
e
Heav
y Nap
tha
H2 & Fuel Gas EthylenePropylene ButadieneBenzene TolueneOther Heavy Components
As feeds go lighter, C3 and C4 molecules
get squeezed out of the yield.
Abundant ethylene expected in USA
Propylene and Butadiene production from
crackers to decrease significantly
C3 Value Chain
20
30. September
2011 GLC CP 21
Alternative Routes to Propylene:
Technical Feasible Routes and Raw Materials
CH2
CH
CH3
n
Hydrocarbons
n = 2 to 18
Steam
Cracker
MTP OHCH
3
Methanol
MeOH
NG, HVR, Coal, Renewables
(Hydro)carbons CH
3
C
H2
CH3
Propane
Dehydro-
genation
Metha-
thesis Ethylene
CH2
CH2
Ethylene
CH2
CH2 Dimeri-
sation Butylene
CH2
CH
CH
2
CH3
North America Industry Projects Overview
Propylene Overview
Company Location Capacity (ktons) Start-up date Technology
Dow Freeport, TX 750 2015 PDH
Formosa Point Comfort, TX 600 2016-17 PDH
Williams Redwater, Alberta, Canada
500 2016-17 PDH
Ascend (C3 Petrochemicals)
Chocolate Bayou, TX 1,000 2017 PDH
Enterprise Mt. Belvieu, TX 750 2018 PDH
LyondellBasell Channelview, TX 200 2014 Metathesis, expansion
PetroLogistics Houston, TX 600 2016 PDH
Rextac Odessa, TX 300 2017 PDH
Dow Freeport, TX 500 2018 PDH
BASF US Gulf Coast (tbd) 400 tbd Methane to Propylene
Total ~5,500
INTERNAL
On Purpose Production of propylene will fill the gap left by ethane-based crackers
It would allow for investment in derivatives back integrated in propane/methane
October 30,
2014 INTERNAL 23
Petrochemical Value Chains
Steam Cracker
Ethylene (C2)
Propylene (C3)
C4 mixture
Refinery
Benzene
Toluene
Xylene
Natu
ral G
as
C
rud
e O
il
C1 Reformer
Syngas
Methanol
Ammonia
Acteylene
Acrylic Acid
Oxo Products
Acrylonitrile
Ethylene Oxide,
Ethanolamines
Vinyl Acetate
Formaldehyde
Acetic Acid
MMA
Butadiene
Raff 1&2, Isobutylene
BDO, THF &
PTHF
Aromatics
Nitric Acid
Caprolactam
Acrylonitrile
Sat Gas Plant
NGL Extraction
Naphtha
Ethane
Propane
Butane
Reformer
C2,3,4 & 6 Value Chains
Cracker Feeds
Value Chain
C1 Value Chain
Highly Favored
Highly unfavored
New Challenges
According to the ACC a 25 percent increase in ethane supply generates:
•17,000 new jobs in the U.S. chemical industry
•$32 billion increase in U.S. chemical production
•$16.2 billion in new capital investment by the chemical industry
•395,000 new jobs outside the chemical industry, including:
• 165,000 jobs in supplier industries, as a result of increase in U.S.
chemical production
• 230,000 jobs from new capital investment by the chemical industry
24
Shale Gas is expected to create a lot of investment for the chemical industry in USA
American Chemistry Council (ACC) Report Impact of Shale Gas on Chemical Industry in USA
Impact of Shale Gas in US Economy and
Manufacturing Industry
25
Shale Gas is having a very positive impact on the US economy creating jobs and large
contributions to local, State and Federal taxes .
Source: IHS-Global Insights
Jobs: 1.6 million
GDP Contribution: $231 billion
Tax Contribution: $57 billion
Jobs: 600,000 jobs
GDP contribution: $76 billion
Tax Contribution: $18.6 billion
2010 2035 (estimate)
All energy intensive industries, e.g. iron, steel and aluminum, benefit from the low energy
costs.
Nucor is building a $750m factory to convert gas and iron ore pellets into iron in Louisiana
for steel mills
U.S. Steel added 200 jobs at its Lorain Tubular (OH) Operations to provide seamless steel
pipe for oil and gas producers
Michelin to expand its Charleston (SC) plant. Invest $750 million to make massive radial
earthmover tires CAGR (2009-11): 20%
600
6,400
6,500
11,200
12,800
13,700
13,700
19,300
21,900
36,100
Poland
Brazil
Algeria
Australia
Europe w/o Poland
South Africa
USA
Mexico
Argentina
China
Source: IEA Estimates & Anlaysis , World Energy Outlook 2011 – US Energy
Information Administration (EIA) sponsored study on global shale resources
Recoverable Shale Resources (bcm)
Previously: 5,300
STRICTLY CONFIDENTIAL 26 GRD/BE
Global Shale
Gas Ressources
No assessment available
Shale Gas prospects
Previously: 24,420
Global Shale Gas Resources There is plenty of shale gas in other regions, especially China
and Argentina
Summary & Conclusions
Ample supply of natural gas in NA at relatively low production costs
Resources are expected to be large enough to cover future demand
increases
Shale gas is providing a great impulse to North American economy in
general and to the petrochemical industry in particular
Wave of investment in petrochemicals in NA:
C1, C2 and NG/NGL-based C3 value chains to be favored in NA
However, challenges in escalated labor costs and project execution
If NA should become a exporter of basic petrochemicals and
derivatives, logistic bottlenecks should be addressed
Are we seeing a tight oil revolution in NA?
27
28
29
Fracturing Fluid Additives Main compounds and common uses
To drill and hydraulically fracture a typical Marcellus Shale well requires 4 million gallons of
water; this volume represents a very small percentage of the total water resources used in the
Marcellus geographical region
The natural gas industry is expected to account for less than one tenth of one percent (0.1%)
of total water use in the Marcellus Shale area
How Much is Four Million Gallons?
The four million gallons of water needed to drill and fracture a Marcellus deep shale gas well is equivalent to
the amount of water consumed by:
New York City in five minutes
A 1,000 megawatt coal-fired power plant in 10 hours
A golf course in nine days
Six acres of corn in a season
While these represent continuing consumption,
the water required for a shale well is a one-time use
Water Usage Comparisons
31
Hydraulic Fracturing is being regulated at the State level in USA. Some States have developed recently
new regulatory framework. Federal regulations might be implemented in the future but not to a degree
that it would be expected to have a negative impact in productions
Water treatment in the past: and today:
Recycling/reusing of produced water
• Produced water is collected and stored in
tanks onsite
• Blended with fresh water during the next
fracturing job
Benefits
• Reduces or eliminates need for water to be sent off-
site for disposal
• Reduces impact on local supplies
• Reduces truck traffic
Environmental regulations Treatment of Flow-Back Water
32 Source: IHS Global Insights
Infrastructure Capital Investment
approx. 330 US$ billion until 2035
US$ Billion
05
101520253035404550556065707580
2010
2011
-201
5
2016
-202
0
2021
-202
5
2026
-203
0
2031
-203
5
Gathering and Processing Interstate Pipelins LNG export
Main investment for gathering and
processing approx. 235 US$ billion,
followed by pipelines approx. 80 US$ billion
Natural Gas market in US is a demand
constrained market with ample supply
resources
The challenge will be whether the pace of
investment permits an acceptable return
under these conditions
Natural gas production will grow faster than
infrastructure, therefore leading to regional
price differences and some regional periodic
production constraints
US Estimated Capital Expenditures in
Natural Gas Infrastructure
Global flaring level in 2011: 140 bcm
Top 10 countries flare 72% of the global flaring in
total (101 bcm)
USA flared 60% more than in 2010 (+2.5 bcm)
33
bcm/a
Sources:NOAA Satellite & Information Services, World Bank, GRD/B Estimates for NGL Recovery Potential
Global flared gas volumes in 2011
were 140 bcm 2011 Top 10 Countries for Gas Flaring
Accumulated
Satelite Flaring
Observations
For decades gas was simply flared