The natural gas industry’s struggle to maintain adequate supply in North America for much of the past decade has resulted in rising commodity prices, despite the drilling boom, and contributed to continuous and significant strides in the application of technology for gas exploration and resource development.

The fundamental driver of these efforts is the relative maturity of the natural gas resource base in North America. Although gas resources are available and new plays are being identified and developed, many of these resources are deeper, smaller, technically more challenging, or more distant from markets. Moreover, these gas resources cost more to find and develop, owing in part to higher service and material costs and to declining well performance. Ultimately, these higher resource costs contribute to sustained gas price strength if less costly alternatives are not available or employed.

The maturity of the North American resource base means that fewer gas reserves are added for every dollar spent on exploration and production activity. Costs to produce gas from many plays may increase further in the years ahead and, in some areas, may exceed the cost of imported liquefied natural gas (LNG). This creates a significant dilemma: as the North American resource base matures further, the underlying long-term floor to market prices will continue to increase if unit-level development costs continue to rise.

In response to this critical need for factual information and insight, CERA and IHS are jointly offering a new Multiclient Study—Diminishing Returns: The Cost of North American Gas in an Unconventional Era . This Multiclient Study is designed to

• answer questions about the cost of producing natural gas in North America today

• forecast future costs and ultimate reserve potential and analyze their role as critical drivers of future North American gas supply

Diminishing Returns addresses the critical and timely concerns facing participants in the North American gas industry:

• Marginal supply basin costs. The analysis is designed to determine the basin-level cost structure.

• Competitiveness of producing areas. The differences in cost structure among producing basins are a critical input in comparing the cost-effectiveness of one resource relative to others.

• Resource potential. Using the latest data and incorporating the impacts of the latest available technology permit the best estimate of North American supply potential for the study period.

• Supply versus cost tiers. A view of the resource potential of each producing basin at various cost levels further illuminates the important dynamic between supply and price.

• Shifts in gas flow dynamics. Insight on the relative competitiveness and the supply potential of different gas resources aids in anticipating—and responding to—shifts in future gas flows.

• Vulnerable gas plays. The relative competitiveness of domestic producing basins compared to other supply regions and to imported LNG helps to pinpoint regions vulnerable to a decline in activity.

Diminishing Returns will answer important questions for several types of companies:

• E&P companies. The relative cost structure and competitiveness of North American gas is important for E&P companies of all sizes. E&P companies must understand the relative competitiveness of their gas production, and need to understand the competitiveness of potential acquisition targets. These companies will need to know how these resources compare across North America and compare with imported LNG.

• Pipeline and storage companies. As domestic gas resources mature, decline or potentially become too costly compared to other domestic alternatives or imported LNG, future gas supplies will shift away from many gas production centers of today. Pipeline and storage developers will need to understand the expected cost and resource potential in supply regions they currently serve or may serve in the future.

• LNG developers. Several companies are planning to deliver LNG to the North American market. Others may be reviewing North America as a destination option. LNG will need to compete directly with domestically produced gas in North America. It will be critical for LNG participants to understand the relative cost competitiveness of landed LNG, both now and in the future.

• Power plant developers and utilities. Gas-fired generation has been the fuel/technology of choice for the last round of power plant additions. Power utilities are now faced with recovering higher gas fuel costs from their customers. Further, the jump in gas costs calls into question the competitiveness of gas-fired plants for the next round of new power plant capacity additions. Power providers will need to understand the role of costs for the future of natural gas in North America.

• Equipment manufacturers and service companies. Companies servicing the gas industry want to understand the potential for drilling activity and all the associated equipment, manpower, and technical services that spring from this activity in North America. That activity is predicated on the competitiveness of domestic supplies and the expectation for drilling in the future.

*This study will cover the US Lower 48, Alaska, and Canada.

CERA has been an internationally recognized leader in the oil and gas industry for 25 years, establishing thought leadership through forward-looking analysis. CERA has maintained a dedicated team of researchers focused on the North American natural gas industry, providing insights and an ongoing market outlook for our clients. We are drawing from our tremendous pool of research for this study and tapping our large, diversified client base to validate the study’s focus and analysis.

The energy division of IHS has been a leading provider of upstream information to the oil and gas industry for over 75 years. Based on the company’s well and production databases, IHS has created highly evolved methodologies to forecast drilling activity and well productivities in North America on a uniquely granular basis. In addition, our exceptional costing tools provide the basis for evaluating capital and operating costs at the well level to estimate the cost of supply. We are utilizing these unique capabilities for this study to provide a detailed view of the marginal cost of gas supply.

CERA and IHS are teaming up to research and produce this study, combining our considerable skills and knowledge to deliver production cost analysis that is exceptional in its detail, scope, and rigor.

The CERA-IHS Multiclient Study Diminishing Returns: The Cost of North American Gas in an Unconventional Era will be produced in two phases:

• Phase I: Current Cost Structure. CERA and IHS will evaluate play-level data to provide analysis covering 45 North American supply basins for current gas production, decline rates, drilling trends, and contemporary cost structure. (These basins are illustrated in the map below.) We will conduct a bottom-up evaluation of finding and development (F&D) capital costs, operating costs including severance taxes, royalty estimates (based on regional hub market-clearing prices using CERA’s proprietary gas price outlook), and a nominal return on invested capital. This phase will rely on the considerable expertise and databases developed and maintained by IHS for approximately 200 North American gas plays. The work will classify gas resources as either conventional or unconventional, as well as identify gas associated with oil production. The cost structure will be estimated based on prevailing rig activity and grounded by our assumptions of normalized drilling costs and production operations.

• Phase II: Outlook for 2010 and 2015. CERA and IHS will develop an outlook for future gas production costs. This outlook will be constructed by first looking at the same variables that dictate costs today. We will evaluate hub prices and the expected drilling response at the basin level, how gas production will respond to drilling activity, and how wellhead revenue will interact with drilling activity and well productivity. Then, using our proprietary analysis of reserve additions, well productivities, play maturation, technological innovation, and cost structure, we will project future production costs. The cost structures that we provide will be calibrated with IHS proprietary decision support tools designed to calculate future development costs. The analysis will incorporate emerging play types such as tight gas and gas shales, as well as coalbed methane. The results will provide a comprehensive perspective on basin-by-basin gas costs in the future.

The Multiclient Study Diminishing Returns: The Cost of North American Gas in an Unconventional Era will establish representative costs for each of the 45 supply basins, as well as an estimate of future gas potential for each supply region at escalating levels of planning prices.
 

CERA will hold a multimedia conference call on November 7, 2006 for study participants where our speakers will present interim results for selected regions. We will also describe the process by which we intend to benchmark the study analysis.

CERA is seeking confidential feedback from clients enrolled in the study to benchmark our preliminary results. Interested study participants can provide feedback (to be received by CERA no later than November 21, 2006).

Diminishing Returns: The Cost of North American Gas in an Unconventional Era will be delivered in two separate components.

Phase I

Written Report

Study participants will receive a report detailing the 2005 unit cost structure (i.e., F&D, operating expenses [opex], royalty, and a nominal return) for gas resources at the basin level. To support the cost stack, the report will provide production history (example shown in the figure below), basin-level decline rates, drilling success rates, and reserve additions by year. This report will be delivered to participants in the Fall of 2006.

Online Access

Study participants will be able to access the detailed Phase I study report data tables online.

Presentation of Results

A multimedia conference call will be scheduled at the end of Phase I to present and discuss the study results.

Written Report

Study participants will receive a report detailing our outlook of costs (i.e., F&D, opex, royalty, and a nominal return) for 2010 and 2015, and resource potential at escalating planning prices, as well as a description of assumptions and methodology. The year 2015 represents not only a point after the first wave of LNG arrives in North America, but also when Alaskan gas might be connected to the broader North American market. This will therefore give study participants a view of the cost competitiveness of continental North American gas relative to new potential gas resources for North America (e.g., LNG).

Online Access

Study participants will be able to access the detailed Phase II study report data tables online.

Presentation of Results

This portion of the study will be delivered to participants in the Winter of 2006/07. A multimedia conference call will be scheduled at the end of Phase II to present and discuss the study results.

As an option, an on-site final presentation can be arranged for an additional fee and subject to separate written agreement.

CERA and IHS are drawing upon the expertise of widely recognized authorities to conduct the analysis and bring insight to this study. Key contributors are listed below.

Michael Zenker, CERA Managing Director, Global Gas

Michael Zenker heads CERA’s Global Gas services, including the Global LNG and North American Natural Gas advisory services. Mr. Zenker leads CERA’s research on the global natural gas industry, delivering a fundamentals-based, independent assessment of the future business environment for natural gas, including the driving forces affecting upstream development decisions, midstream asset value, pipeline value, marketing/trading, and consuming market prices. He has over 15 years’ experience in the energy industry, including extensive experience in both the gas and power sectors. He assists clients with business strategy, market entrance strategy, asset valuation, liquefied natural gas strategy, pipeline and storage capacity investment decisions, and procurement strategy. Mr. Zenker has testified before the US Congress on the natural gas industry. Previously, Mr. Zenker led a gas and power trading organization for Southern California Edison, where he was responsible for commodity trading, pipeline and storage asset management, contract management, and power plant dispatch. Mr. Zenker holds a BS and an MBA from the University of California.

Charles Lucas-Clements, Managing Director, IHS Economics and Consulting Division

Charles Lucas-Clements has more than 26 years’ consulting experience in the oil and gas industry, covering a broad range of issues including oil and gas production, processing, refining and related energy facilities. An expert on the development and utilization of natural gas, in recent years he has specialized in strategic and implementation issues facing both national and international oil companies. He has authored a number of industry studies and articles for publication and has also developed dynamic gas models, most notably for the Worldwide Stranded Gas Strategies Study; Focus on Mexico: the Natural Gas Chain—Opportunities Arising from Changing Policies; The North American Dynamic Gas Business Model; Nigeria’s Master Gas Plan, and China’s Strategic Master Gas Plan. His international assignments have included the United Kingdom, North and South America, Scandinavia, Europe, the CIS, Africa, the Middle East, and the Far East and Pacific regions. Mr. Lucas-Clements received his BS in chemical engineering (with honors) from the Imperial College of London.

Michael Bodell is a widely respected expert in natural gas dynamics, including gas market fundamentals, gas modeling, scenario planning, and strategy development. With over 25 years’ experience in the energy industry, Mr. Bodell has extensive knowledge in evaluation of resource and midstream opportunities and risk management, as well as expertise in gas storage, gas trading, power plant development and natural resource exploration and exploitation. Before joining CERA, he was Director, Strategic Planning & Market Analysis, in Unocal Midstream & Trade, where he was responsible for fundamental analysis and price modeling of gas for the North American market. Mr. Bodell has also been an industry advisor to the Independent Petroleum Association of America’s Supply and Demand Committee; to the Western Interstate Energy Board (via the California Energy Commission, 2004–05) on gas modeling, scenario planning, and strategic policymaking; to the National Petroleum Council on the 2003 North American Natural Gas Study; and to the Gas Research Institute 2000 Baseline study. He also advised the Federal Energy Regulatory Commission and the US Department of Energy on gas market fundamentals. Mr. Bodell holds a BS in geology and a MS in geophysics from the University of Utah and an MBA from the University of Ateneo de Manila.

Carl Garrison, Operations Director for IHS Economics and Consulting Division

Carl Garrison is responsible for leading global consulting projects focusing primarily on the integration of IHS data, tools, and worldwide knowledge of oil and gas fundamentals and industry trends into key client strategies and market evaluations. Carl joined IHS in 2003 after spending 10 years at Halliburton, where he led the global Strategic Intelligence and Planning function. Mr. Garrison’s experience covers a wide range of projects focusing on fundamental analysis of oil and gas resources, including supply and demand modeling, commodity pricing dynamics, capital investment analysis, and corporate/government strategy encompassing the entire energy value chain. Mr. Garrison holds BS and MS degrees in Resource Economics from Oklahoma State University.

Robert Ineson, CERA Director and head of CERA’s North American Natural Gas Advisory Service

Robert Ineson has over 20 years of energy industry experience, with expertise in most areas of the industry, including exploration and production, gathering and processing, intra- and interstate pipelines, gas distribution, electric power, and mergers and acquisitions. Mr. Ineson’s current research focuses on the developing market for LNG in North America. Mr. Ineson also specializes in analysis of North American gas markets, natural gas pricing, modeling of the North American gas transmission grid, and corporate strategy. He joined CERA from Coral Energy, where he was Director of Market Forecasting. He previously held analytical positions with Texas Eastern, KN Energy, and Tenneco Energy, and was Principal of the gas consulting practice at Resource Data International (RDI). Mr. Ineson is the author of RDI’s Convergence of Gas and Power and of articles on gas transportation modeling, deregulation, and the North American gas market. His past work includes the CERA Multiclient Studies New Realities, New Risks: North American Gas and Power Scenarios Through 2020 and The Alchemist’s Challenge: Turning the Southern Cone’s Natural Gas into Gold . His recent research has focused on the impending surge of LNG supply into North America, natural gas and the Energy Policy Act of 2005, and North American gas market fundamentals. Mr. Ineson holds a BA from the State University of New York at Albany and an MBA from the University of Pennsylvania’s Wharton School.

Antonio Barbalho has over 23 years’ experience covering energy, utilities, and financial institutions. His responsibilities have ranged from managing teams to head of corporate strategy and negotiations with multilateral organizations and Economic Development Agencies. Previously, Antonio was a member of Deutsche Bank, which included positions in Wood Mackenzie, Corporate Finance, and Emerging Commodities teams conducting market analysis of the global LNG market and introducing new approaches to assessing projects, positions, and contracts focused on innovative approaches for “managing the value gap” in the energy business. Mr. Barbalho graduated from the Federal University of Pernambuco with a degree in Electric, Electronic and Systems Engineering and a postgraduate Diploma in Economic Analysis. He holds an MPhil degree in Electrical Engineering and Management Science from Strathclyde University in Glasgow.

Daniel Collins, CERA Director, Canada

Dan Collins specializes in Canadian natural gas supply, demand, storage, price and economic fundamentals, business strategy, and assessment of new project developments including Alaska and Mackenzie Delta gas. In addition to his work with the CERA North American Natural Gas and Western Energy teams, he also is responsible for the operation of the CERA Calgary office and editor of the CERA North American Natural Gas Monthly Briefing. His recent research includes analyses of Canadian coalbed methane and of Canada’s oil sands. Previously, Mr. Collins was Vice President of Operations for KeySpan subsidiary Northeast Gas Markets (NEGM), where his responsibilities included management of the Alberta Northeast and Boundary natural gas supply consortia, the largest Canadian natural gas supply contracts into the US Northeast. Mr. Collins holds a BA from the University of Massachusetts at Amherst and an MBA from the Carroll Graduate School of Management at Boston College.

Robert W. Esser, CERA Senior Consultant and Director, Global Oil and Gas Resources

Robert W. Esser is an authority on worldwide oil and gas productive capacity, and on global exploration and producing activity. For the past 15 years, he has led CERA’s work on upstream activity, prospects for existing world oil production, the significance of recent discoveries, the pace of future discoveries and their influence on future productive capacity, and North American natural gas supply. Prior to joining CERA, he was the Mobil Oil expert responsible for energy resource and oil and gas supplies projections, used by Mobil both for crude price forecasts and as a basis for the exploration and production strategy. Mr. Esser is a member of the American Association of Petroleum Geologists (AAPG) and a trustee of the AAPG Foundation. He is the author of many CERA studies. His recent reports include World Liquids Capacity Outlook to 2010: Tight Supply or Excess of Riches? (with Peter Jackson) and numerous CERA analyses of global exploration and production for oil and gas, including reports on North American natural gas productive capacity with emphasis on the Gulf of Mexico and US Lower 48. He holds two degrees in geology, a BS from Yale University and an MS from Stanford University.

Michael F. Farina is a natural gas market expert in the areas of price forecasting, gas transportation strategy, gas supply economics, and asset valuation. He assists CERA clients with scenario planning, model development, pipeline and storage asset valuation, and fuel procurement strategies. He also has extensive experience with western gas and power markets, including infrastructure issues in the Rocky Mountains, California, and Southwest. Mr. Farina’s recent research reports examined the pricing dynamics between eastern and western North American gas markets, and LNG development on the Pacific Coast, together with ongoing gas market analysis and commentary as part of CERA’s Western Energy Advisory Service. Prior to joining CERA, Mr. Farina served as a Senior Consultant with Platts/RDI Consulting. He led RDI’s gas forecasting services, for which he was the primary author of a major analysis of gas transmission. Mr. Farina holds a BA from Colorado State University and an MA from the University of Colorado.

Curtis Smith, IHS, Senior Geoscience Consultant

Curtis Smith is an integral part of the IHS Strategic Consulting Practice, responsible for oil and gas supply forecasting for the North American Gas Business Model, as well as other strategic projects including North American and International basin studies, market studies, mapping and forecasting, and workflow-based client training. Mr. Smith has been at IHS for over ten years and previously worked at Marathon Oil Company and ConocoPhillips Company. While his experience covers a wide range of technical and business related projects as well as training and support, his key strength is a knowledge of technical and business data and products (with a strong focus on IHS data and products) and their use and application in the upstream oil and gas industry. Mr. Smith holds a BS and an MS degree in geology from Brigham Young University.