John Deutch Lecture On Oil Gas, 2014

Geopo||ncs of Unconvennona| C|| & Gas
New Markets, New k|sks, New o||c|es

Context: C&G's ro|e |n the economy and fore|gn aa|rs
What |s d|erent about Unconvennona| C&G?
1he North Amer|can Lxper|ence
Imp||canons for Ma[or producers and consumers
Some cases: kuss|a, Iran, Ch|na, Saud| Arab|a, ..
Uncerta|nnes
Iohn Deutch
Insntute rofessor, MI1, Cambr|dge MA 02139
March 11, 2014
Cut||ne of resentanon

1/20/2013 1 !"#
C|d V|ew
C&C global resources
concenLraLed ln Mlddle LasL and
a few ma[or resource holders.
Large economles hopelessly
dependenL on oll and lncreaslngly
gas lmporLs.
1he real prlce of C&C wlll
lnevlLably lncrease.
naLural Cas MarkeLs lnevlLably
reglonal - Lurope, Asla, norLh
Amerlca.
New V|ew
unconvenuonal C&C (shales,
ughL sands, coal bed CP
4
) wldely
avallable around Lhe world.
revlously dependenL economles
wlll sLop belng lmporL dependenL,
e.g. u.S.
lncreased supply may lead Lo
lower real prlces for several
decades.
Clobal naLural Cas markeL
posslble, buL noL soon.
1/20/2013 !"# 2
Imp||canons of the changes
Lnergy, especlally C&C, wlll conunue Lo be key Lo economlc
performance and geopollucal aalrs.
Consumers wlll beneL from lower prlces, e.g. lower cosL for home
heaung wlLh naLural gas.
1here wlll greaLer demand for C&C due Lo lower prlces.
1he shl ln relauve prlces (C&C, coal, nuclear, renewables) wlll cause
shl ln energy use, e.g naLural gas for elecLrlc power generauon.
Wlnner & Loser among Lradluonal ma[or resource holders.
1/20/2013 !"# 3
WhaL ls dlerenL abouL unconvenuonal C&C?
1/20/2013 !"# 4
keep sca|e of producnon |n
m|nd.
1/20/2013 3 !"#
Lnormous surface operanons

1/20/2013 6 !"#
1/20/2013 7
In|na| Lnv|ronmenta| Concern - nydrau||c fractur|ng u|d contam|nanng
dr|nk|ng water - not the ma[or env|ronmenta| |ssue
!"#
Iu|| d|sc|osure of a|| add|nves - type and quannty
r|nc|pa|
Lnv|ronmenta|
|mpacts:
_Water qua||ty
_A|r qua||ty
_Commun|ty |mpacts
_Land-use |mpacts
_Induced Se|sm|c|ty
1/20/2013 8 !"#
key po|nts:
Not [ust hydrau||c
fractur|ng
A|| env|ronmenta|
|mpacts of producnon
shou|d be |nc|uded
D|erent than
convennona|
producnon
Lxpect great d|vers|ty
Clobal MarkeLs
1/20/2013 !"# 9
1/20/2013 10 !"#
1/20/2013 !"# 11
kap|d growth of Unconvennona|
C&G producnon |n US
1/20/2013 12
Lxp|os|on of Sha|e gas resource |s wor|d-w|de
!"#
1/20/2013 !"# 13
LlA !une 2013 esumaLes
!"#$%" '()#*+,( -%)( .#/(01%" 2*3(
40,(+/%501() 6%+3(
Large varlauon wlLhln resource play - Cll/Cas/WaLer.
LnvlronmenLal lmpacLs and producuon cosL.
Cll/Cas prlce uncerLaln boLh ln local economy and globally.
Lconomlcs of global LnC Lrade uncerLaln.
C&C lnfrasLrucLure ls huge and expenslve so pace of commerclal
developmenL wlll be slow.
urllllng and sumulauon Lechnology mosLly ln norLh Amerlca.
Pard Lo predlcL relauve economlc value of oll/gas for domesuc use
compared Lo exporL.
1/20/2013 14 !"#
Imp||canons for g|oba| o|| & gas markets
1he norLh Amerlcan Supply shock has noL and wlll noL, by lL self, resulL ln
a craLerlng of Lhe Lhe world oll prlce.
1he relauvely hlgh levels of global spare producuon capaclLy, nA
producuon growLh, and slower global demand growLh polnLs Lo poLenual
oll prlce drop Lo Lhe range of $70 - $90 per barrel.
Clobal spare capaclLy has dampened mlnor" supply dlsrupuons: Syrla,
nlgerla, Llbya, ?emen.
M8Ps such as lran, venezuela, 8ussla have suered negauve wealLh
eecL - Lhe value of Lhelr convenuonal C&C resources have gone down.
Lxpenslve convenuonal C&C pro[ecLs are now underwaLer: AusLrallan
C8M, Culf of Mexlco deep o shore, and Aruc oll.

1/20/2013 !"# 13
Ma[or econom|c quesnons
Wlll naLural gas prlces malnLaln reglonal dlerence ?
nA $4/MCl Lurope $10/MCl Asla $16/MCl
Wlll Lhe energy equlvalenL dlerence beLween oll and gas conunue ?
Cll $100/b = $13/MM81u nA naLural gas $4/MM1u
1remendous economlc lncenuve for Lechnology change LhaL wlll
lncrease naLural gas demand:
naLural gas ln power generauon (dlsplaclng nuclear, renewables,
coal)
naLural gas ln LransporLauon secLor: CnCvs or bl-fuel vehlcles?
Cas Lo Llqulds (C1L) Lransform CP
4
Lo CP
3
CP.
1/20/2013 !"# 16

!
Ceopollucal lmpllcauons
1/20/2013 !"# 17
now qu|ck|y w||| new Unconvennona| C|| & Gas
producnon come on ||ne?
ln u.S. resource belongs Lo land owner - noL Lhe governmenL.
1remendous nanclal lncenuve Lo explolL resource.
norLh Amerlcan has much greaLer lnLenslLy of drlll rlgs and pumplng
equlpmenL and sumulauon Lechnology.
nauonal oll companles do noL have Lechnlcal know-how of lnvesLor
owned L& companles.
Large over hang of convenuonal C&C producuon capaclLy.
1/20/2013 !"# 18
Changes |n U.S. Lnergy o||cy
u.S. (and n.A.) wlll have Lhe poLenual Lo exporL oll, gas (and coal)
so u.S. wlll be more lnuenual ln balanclng world markeLs.
norLh Amerlca wlll become eecuvely lndependenL of oll lmporLs" buL
Lhls does noL mean energy lndependenL."
1he change ln Lhe u.S. energy posLure slgnlcanLly lncreases forelgn
pollcy leverage and wlll advance lLs lnLeresLs.
Changes besL undersLood by conslderlng counLry examples
1/20/2013 !"# 19
S|x country examp|es
lran
8ussla
Saudl Arabla
Chlna
venezuela
Mozamblque
1/20/2013 !"#

!
o|nts to remember
Lnergy ls always an
lmporLanL parL of
forelgn pollcy
llrsL prlorlLy - avold
conlcL
Cll & Cas ls only one
aspecL of energy
lncreased supply
favors consumers.
8llaLeral & MululaLeral
acuon
Iran
l lssues: nuclear weapons program,
Lerrorlsm, lraq, lsrael/alesune
Cll producuon: 3 mllllon b/d exporL
reduced by sancuons. 8urden for
lmporung counLrles such as !apan,
Cermany, Chlna.
lncrease ln global supply lmposes
Lremendous wealLh loss" of lran's gas
resource base (due Lo anuclpaLed fall ln
naLural gas and oll prlces).
lncrease ln global supply encourages
greaLer rmness by lnLernauonal
communlLy on lran Lo reverse course on
Lhelr nuclear program.
1/20/2013 !"# 21
kuss|a

8usslan economy hlghly dependenL on C&C exporLs.
LasLern Lurope, especlally Cermany, dependenL on 8usslan naLural gas
exporLs wlLh prlclng lndexed Lo oll. 1hls dependence lnuences Lhe
forelgn pollcy posluon of Cermany and oLher counLrles.
ulverslLy of supply leverages Lurope's bargalnlng posluon.
Lower prlces means: lower revenue, lower lnvesLmenL ln C&C secLor.
Ma[or economlc rlsk for 8ussla and conLrlbuLes Lo pollucal lnsLablllLy.
1/20/2013 !"# 22
Saud| Arab|a
CreaL rlsk from lower oll and gas prlces.
llscal breakeven for klngdom sald Lo be $90 per barrel (lMl esumaLe).
rolonger drop ln oll prlce wlll make lL dlmculL Lo malnLaln soclal safeLy nexL aL a
ume when expecLauons rlslng among Lhe younger generauon. (Saudl cluzen
unemploymenL raLe ls abouL 10).
SlgnlcanL rlsk LhaL monarchy ls desLablllzed - wlLh successor governmenL less
lncllned Lo sLablllze Lhe global oll markeL.
Powever any successor reglme wlll conunue Lo be oll exporLer.
CLher M8P have slmllar rlsk: Algerla, lraq, Llbya, and ?emen.

1/20/2013 !"# 23
Ch|na
Chlna's economlc growLh requlres lncreaslng consumpuon of C&C.
(+40 C&C lmporLs 2012 Lo 2033).
new opporLunlues for needed C&C supply:
o unconvenuonal C&C producuon (buL waLer ls a consLralnL).
o CreaLer lmporLs from 8ussla and CenLral Asla.
naLural Cas lmporL prlces llnkage Lo oll weakened - lndex Lo oll reduced.
luLure supplles from AusLralla cheaper.
Lases Chlnese lnLeresL ln golng ouL" for oll and gas reserves.
1/20/2013 !"# 24
Venezue|a
venezuela has been a Lhorn
ln Lhe u.S. slde for a long
ume.
venezuela has provlded oll
Lo Carlbbean and CenLral
Amerlcan counLrles galnlng
lnuence ln Lhe reglon.
rospecLs LhaL vZ exporLs Lo
reglon wlll be decllne ln
nexL several years.

1/20/2013 !"# 23
Mozamb|que
lnLeresung example Lnl and
Anadarko conslderlng large
LnC pro[ecLs.
laned on assumpuon LhaL LnC
prlce lndexed Lo oll. no longer
Lrue.
Ma[or lncrease ln reglonal supply
lmpacLs reglonal markeL, ln Lhls
case lran.

1/20/2013 !"# 26
1/20/2013 27 !"#

John Deutch Lecture On Oil Gas, 2014

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Geopo||ncs of Unconvennona| C|| & Gas

New Markets, New k|sks, New o||c|es

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