Monday, November 28, 2016

Breakeven Rundown: Mediterranean, GoM Gas Outshine Others - HART ENERGY / STRATAS ADVISORS

Monday, November 28, 2016 - 3:00pm
Velda Addison

When it comes to breakeven prices for development projects targeting natural gas, the ultradeep water of the Mediterranean Sea and the deep U.S. Gulf of Mexico are hard to beat.

This is based on research conducted by Stratas Advisors, which studied the economics of about 150 natural gas assets worldwide.

“Driven by the low-cost Leviathan gas development with high well productivities offshore Israel, the breakeven price of the ultra-deepwater development is only about $1.5/Mcf [thousand cubic feet], much lower than its counterparts in the shallow-water and deepwater developments in Egypt and Libya, where the breakevens are around $4.4/Mcf and $3.8/Mcf,” the research and consulting company said in a report. “The low cost giant gas discovery Zohr, offshore Egypt, drives the average price down in the deepwater segment.”
Highlights of the report on breakevens for natural gas projects, which were weighed by an estimate of 2P reserves on a barrel of oil equivalent basis, were shared Nov. 28. The release came a few days after supermajor BP Plc (NYSE: BP) agreed to buy from Eni a 10% interest in the Shorouk concession, where the Zohr gas field is located, in a $375 million deal.

In addition, gas projects in the Mediterranean region are also still attracting financing, despite challenging market conditions. The latest is an agreement between the Delek Drilling Ltd. and Avner Oil Exploration Ltd. partnerships with HSBC Bank Plc and J.P. Morgan Ltd. concerning financing for the Noble Energy-operated Leviathan development. Financing ranges between $1.5 billion and $1.75 billion.

Although Henry Hub natural gas spot prices have fallen from highs near $12.70 per million British thermal units (MMBtu) in June 2008 to just under $3/MMbtu in October 2016, favorable break-evens bode well for natural gas developments’ ability to help meet the world’s growing energy needs. Global consumption of natural gas is projected to rise to 203 trillion cubic feet (Tcf) by 2040, compared to about 120 Tcf in 2012, according to the U.S. Energy Information Administration’s International Energy Outlook.

Stratas’ report also showed attractive natural gas breakevens in the U.S. Gulf of Mexico (GoM), which came in on the lower end of the curve with a $1.50/Mcf break even for conventional deepwater developments and a $2.70/Mcf for ultra-deepwater developments.

Breakeven prices offshore Africa, particularly offshore Tanzania and Mozambique, were higher, coming in at about $3.70/Mcf and $4.80/Mcf, respectively. However, onshore developments had lower breakeven prices—about $2/Mcf.

The report also revealed:
  • Middle East breakevens of about $2/Mcf for shallow-water gas developments led by Iran’s South Pars, where Total SA will work will CNPC and Petropars to develop the two-phase South Pars Phase 11 project. But the amount is higher for projects onshore, including tight gas and sour gas developments, where the breakeven is nearly 3x as much;
  • Northwestern Europe developments, such as in the U.K. North Sea, offshore Norway and the Norwegian Sea, had higher breakevens of about $3.9/Mcf for shallow-water and $7.1/Mcf for deepwater; and
  • Developments aiming for natural gas in Latin America, including Mexican territory in the GoM, had high breakevens of $4.8/Mcf for shallow-water projects and $5.7/Mcf for deepwater projects.
But the price of natural gas would have to skyrocket to make break-even prices look appealing in the Asia-Pacific region. Here, Stratas’ data show ultra-deepwater gas developments in Indonesia and India are about $8/Mcf. Shallow-water break-even development costs are about half of that.

Velda Addison Senior Editor, Digital News Group Hart Energy