Morgan Stanley blows up the gas panic

At last some sense on the Australia gas panic from Morgan Stanley. For some time I’ve been arguing solo that the premisses of the eastern states gas debate are fallacious. Particularly because the desperate push to mine more gas will do nothing to lower prices owing to its more expensive production costs (no matter where it ends up).

MS examines just how expensive:

Shale gas is high cost for the following reasons:

1. Many wells are required for commercial production. Low production rates and recoveries of small volumes per well characterize shale gas fields. Many wells per field are required to achieve sufficient production. A typical shale gas well may initially produce at rates in the order of 2-10 MMscf/d, decline at 80% p.a. and recover a total volume of 2-8 Bcf over 20 years, depending on the geology.

2. Shale gas wells are more expensive. In most cases, shale gas wells require a horizontal section to be economically viable. Horizontal sections require a bigger (more costly) drilling rig. These wells often use more consumables such as casing, cement, drilling fluid, etc. because they are longer and take more time to drill. Hydraulic fracturing (fracing) adds to the well cost due to the equipment and chemicals required. We estimate that a 3,800m deep vertical well in the Cooper Basin, drilled over 60 days costs circa US$10m (excluding fracing). Approximately 80% of the cost is variable and related to day-rates or depth (Exhibit 8). Rig mobilisation costs, access roads, fracing and well testing adds to the cost. We estimate vertical well costs including fracing and testing are likely to be in the order of US$15m with horizontal wells more expensive again, in the order of US$20m.

3. Infield infrastructure costs. Large numbers of wells dictate a higher investment into field gas-gathering facilities, processing and compression. There are economies of scale if gas processing is centralized, however, a particular challenge is optimising field gathering systems to handle the ‘peaky” production profile from shale wells. Optimum investment into gathering and processing requires stable long-term production, so that operational capacity can be fully utilized for the maximum time. Individual shale wells are not well suited to deliver base load production.

MS models a small and large scale project and these yield the following numbers:

Screen shot 2013-10-23 at 11.39.45 AM

Check out the break even prices which equate to roughly $8 and $7mmbtu. These are the asme as the netback prices for current gas export projects meaning:

We expect competition from US exports, and other new entrants will effect to attenuate global LNG price structures. We expect oil-linkage to remain but the linkage to ease. We assume current Asian LNG prices in the US$15-$16/mmbtu range ease back to the US$12-$13/mmbtu range after 2017. These are delivered prices into Asia. For domestic LNG netback pricing parity, we back out shipping and processing costs, which results in net-back prices into the plant approximating US$8-$9/mmbtu. This translates to A$9.1/GJ – A$10.2/GJ at current conversion rates. We think domestic prices longer term will be capped at these levels. Any higher, and marginal gas molecules destined for export would be diverted to the domestic market.

Precisely. Mining more gas won’t do squat. No doubt protection will be the policy of choice.

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  1. Clearly delivered to Asia 2017 not HH which is exactly what the key producers have been advising (warning). Most recent I have seen is in the $13-14 range )

  2. Ross Gittins is against gas subsidies and protectionism as he eloquently puts it:

    Longer-term, protection involves keeping your head in the sand and pretending the rest of the world isn’t changing. This is unsustainable. When the world we live in changes, we have to adapt to that change or become an industrial museum.

    Then there’s the protection for local pill-making companies (not to mention retail chemists) hidden in the pharmaceutical benefits scheme. And coming up is a bid by manufacturers to be exempted from paying the world price for gas when the eastern states become part of the world gas market in the next year or two. We’ll hear a lot more about this one.

  3. HnH. Sit back and take a breather on this issue. you cant stop the operation now, best you can do is to highlight the environmental issues and ensure the environmental compliance practices are followed.
    The inability of the developers to reduce the capital risk by offloading portion of their stakes is well known. To me that illustrates the capital risk in the project. Who knows what developments will occur offshore to cause headwinds to these Australian projects, at the time the projects were mooted the future looked rosy. Some say the projects will create employment, the only employment I can see is that the crews who built the projects will be best placed to dismantle them and relocate them offshore. Time will tell. WW

  4. Just don’t see why the gas price need be so high. If access to NSW CSG this can be brought to market for $3.5. There is lots of it available and even more shale which is likely to cost only $4 plus a $0.7 haulage charge. Of course with regulatory restraints even $15 becomes a prospect.

    • notsofastMEMBER


      I’m with you on this. CSG is not Shale Gas. CSG wells are typically much shorter and don’t involve complex fracking operations. $5 to $6 per mcf delivered is the price range that can be expected to provide a small return to the gas producers. Lots of drilling in NSW CSG fields could see an over supply of natural gas in the NSW and Victoria gas market which could suppress gas prices down to the $3 to $4 per mcf range.

      • Al, the gas flow from csg wells drops off dramatically once the well is tapped. Watch how the CSG companies will champion fracking as necessary to get more gas. Time will tell.WW

  5. HnH,

    that is horribly disingenuous of you. In fact it is down right misleading. If you don’t know what you are talking about then take a wide birth.

    Don’t let your activism cloud your good judgement. The shale gas comments from MS have little to do with the prevailing supply on the east coast.