SWN is committed to – and recognized for – responsible energy development, and we recognize stakeholder concerns about climate change. We also understand that regulations and practices aimed at protecting the environment, and specifically reducing greenhouse gas (GHG) emissions, can affect our business. We examine and address these issues as part of our risk management process.

In addition to efforts to limit our own emissions, we consider the long-term consequences of new regulations and industry-leading practices aimed at limiting overall climate impact. We closely follow developments in policy and stakeholder sentiment through frequent engagement with local community members, government officials and investors. We also consider future price and demand projections, such as those from the Annual Energy Outlook published by the U.S. Energy Information Administration (EIA) and from the World Energy Outlook published annually by the International Energy Agency (IEA).

We are particularly interested in price and demand projections regarding low-carbon natural gas, which, along with natural gas liquids (NGLs), comprises essentially all of our production. We regularly undertake extensive analyses of our proved reserves development potential under a range of possible future regulatory and emissions scenarios, the results of which are presented here. We will continue to update this analysis in the future.

Our corporate responsibility reporting is aligned with recommendations from the Task Force on Climate-Related Financial Disclosures framework. See the report Appendix for more information.

Demand for Natural Gas Is Likely to Increase

Demand for natural gas and associated NGLs in the United States and around the world will grow through 2040 under a wide range of scenarios, according to the EIA. In its 2019 publication World Energy Outlook 2019, various scenarios indicate new gas resources must be developed. Under the Current Policies Scenario, energy demand rises by 1.3% each year to 2040, and even under the more restrictive Stated Policies Scenario, energy demand rises by 1% per year to 2040.2  In this scenario, low-carbon sources supply more than half this growth, with natural gas demand driven in large part by rising liquified natural gas (LNG) exports; oil demand plateaus in the 2030s, and coal use reduces.

80% of [natural gas] growth has been concentrated in three key regions: the United States, where the shale gas revolution is in full swing; China, where economic expansion and air quality concerns have underpinned rapid growth; and the Middle East, where gas is a gateway to economic diversification from oil. Liquefied natural gas (LNG) is the key to more broad-based growth in future. IEA (2019), “Gas,” World Energy Outlook 2019, IEA, Paris

While the impact of COVID-19 has temporarily reduced natural gas demand in power and industry applications, it is expected to progressively recover by 2021, with most post-2021 growth taking place in Asia, led by China and India where natural gas benefits from strong policy support.3 With substantial low-cost reserves, SWN is also well-positioned to produce and deliver the natural gas and NGLs needed to meet this growing demand.

SWN’s Proved Reserves Are Likely to Be Produced, Even Under Stricter Policies

SWN reported 12.7 trillion cubic feet of gas equivalent (Tcfe) of proved reserves as of year-end 2019. Proved reserves are a direct and commonly used measure of how much gas or oil a company will be able to produce profitably. We believe that substantially all of SWN’s proved reserves as of year-end 2019 are likely to be produced even with heightened climate change policies and practices. The U.S. Securities and Exchange Commission (SEC) requires that energy companies report their reserves according to specified methodologies. Under these requirements:

Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically
producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.4

Thus, proved reserves must be economically producible or either economically producing or certain of starting production within a reasonable time. Importantly, any changes to regulations to combat climate change that impact production levels, methods, costs and/or demand for the commodities we produce would be reflected in the periodic reporting of reserves. If and when these measures arise, the transparency of reserve reporting assures that investors will quickly see their impact.

The following factors point toward SWN’s ability to develop substantially all of our current proved reserves, even with stricter climate-related regulation and practices:

  • Like most energy companies, the vast majority of SWN’s existing proved reserves are likely to be produced within 10–15 years.5
  • As noted above, the IEA has concluded that gas demand will increase under its Current Policies Scenario, and that new gas resources must be developed even under its more stringent Stated Policies Scenario. Which reserves will be produced depends on supply and demand.
  • Regulations or practices focused on mitigating climate change can affect demand by limiting the amount of natural gas that can be consumed or encouraging consumption as a substitute for higher-carbon fuels. As a simple matter of economics, should demand fall, the reserves with the lowest marginal cost of production are the most likely to continue producing.
  • Currently producing reserves – reserves with wells in place and connected to pipelines, which comprise more than 50 percent of the reserves shown in SWN’s year-end 2019 SEC filings – are likely to continue producing, because the marginal cost of producing from existing wells is small.
  • SWN’s core nonproducing reserves are in the Appalachian Basin, which, as the figure below shows, has some of the lowest break-even production costs in the United States, the only market where SWN operates.

Thus, even if prices fall due to higher production or lower demand, SWN’s core assets are among the most likely to continue producing and to be developed.

Scenario analyses consider and seek to understand the strength of an enterprise when stress tested. In the case of climate change, scenarios allow an organization to explore and develop an understanding of how the energy transition may affect the business over time. A critical aspect of scenario analysis is the selection of a set of scenarios that cover a reasonable variety of future outcomes. Scenarios are not intended to represent a full description of the future, but rather are hypothetical constructs highlighting central elements of a possible future and to draw attention to the key factors that will drive future developments. 6

In the IEA’s World Energy Outlook 2019, three scenarios were presented: “Current Policies,” “Stated Policies” and “Sustainable Development.”

The Current Policies Scenario assumes there are no changes in current climate policy. The Stated Policies Scenario incorporates today’s global policy intentions and targets, and the Sustainable Development Scenario (SDS) meets sustainable energy goals in full, requiring rapid and substantive changes across all parts of the energy system. This scenario proposes a path fully aligned with the Paris Agreement by holding the rise in global temperatures to below 2°C.

With respect to the Sustainable Development Scenario, the IEA reports:

… investment in both new and existing sources of natural gas supply is needed. Investment in current sources of production slows the natural decline rate to the annual loss of supply…. Investment in new fields is then also required to ensure a smooth balance between supply and demand.7

As indicated in the following chart, the weighted average cost of SWN’s 2019 reserves are well within all scenarios, including the most stringent Sustainable Development Scenario, and thus they are likely to be produced.7

SWN Weighted Average Cost of Supply vs. U.S. Supply Curve in Various EIA Scenarios

Notes:

  1. Cumulative North American supply volumes for the three different scenarios sourced from IEA World Energy Outlook 2019 Annex A: Fossil Fuel Production
  2. Overlaying the three scenarios is a relative North American gas cost curve based upon Rystad Energy data.
  3. SWN reserves in $/mcfe (dark blue circle lying on the cost curve) is based on the cost curve for North American gas supply potential only and is not reflected in the x axis volumes.
  4. The SWN reserve break-even cost of $2.37 calculated using data contained in the SWN Form 10-Q for the quarterly period ended March 31 2020.

SWN Is Not Likely to Spend Capital on Assets That Will Be “Stranded”

SWN has been an early adopter and innovator in reducing emissions from our operations and encourages downstream sectors to do the same. When making an investment in new wells or reserves, we consider whether we will be able to recover the capital we deploy, in light of a host of factors, including new regulations and policies such as those designed to limit climate change. Capital conceivably could become “stranded” if policies shift after a company has made large capital investments that must be recovered over decades – for example, transportation and processing infrastructure or massive-scale projects requiring long lead times, such as large non-U.S. or offshore projects.

In accordance with SWN’s Formula, we wisely invest within the cash flow that is generated by our underlying assets. Should policies and practices aimed at mitigating climate change alter demand for our commodities, costs of production or both, our planning practices take those modifications into account.

SWN practices capital discipline. In response to a dramatic fall in natural gas prices, SWN ceased drilling entirely in January 2016. We resumed drilling as prices stabilized later that year, but reduced our capital investments to $1.3 billion in 2017 and maintained a similar level of investment in 2018.  As commodity prices continued to fall in 2019, our capital program was reduced to $1.1 billion.  With a further reduction of commodity prices in 2020, the plan is to invest $860 – $940 million.

As regulations and norms change, SWN’s business practice shows that we can adjust our capital expenditures to levels projected to generate an attractive return. SWN’s low-cost resources are well positioned under multiple scenarios. Our industry leading performance in reducing GHG emissions further enhances our ability to comply with new policies and practices. Our capital discipline constrains us from investing in assets that are unlikely to recover their capital costs. Any impacts that do affect the ability to produce reserves would be reflected under SEC regulations governing the reporting of reserves.

The IEA pointed out that the risk of stranded assets to independent oil companies is small relative to other producers8 and further noted that lower-cost resources, in terms of efficiency and cost discipline will naturally be favored, regardless of the demand outlook. SWN demonstrates capital discipline by adjusting its annual capital spend to align with the movement in discretionary cash flow from commodity prices. We will complete the use of Fayetteville sale proceeds ($600 million) at the end of 2020, and our plan is to continue to use discretionary cash from our assets to drive the capital program. We exhibit cost efficiency through operational execution and completion design optimization; well costs were $824/CLAT for a 10,000’ lateral in 2019 and are expected to be $730/CLAT for a 12,000’ lateral in 2020.

Further, the IEA states:

Natural gas fares better…most energy transition outlooks, including the SDS. The profitability of gas supply is often more challenging than oil, but in recent years many companies have sought to increase the level of natural gas in their project portfolio. This is partly because of the greater number of development opportunities for natural gas, but is also a response to the better prospects for gas demand.9

The IEA goes on to say “oil and natural gas with lower emissions intensities will be better positioned than higher-emitting sources, and would likely be increasingly preferred for development. Actions to reduce emissions from oil and gas operations include…tackling methane emissions.”10  SWN is a recognized leader in emissions performance, with a methane intensity of 0.055% in 2019.

Conclusion

SWN’s low-cost resources are well positioned under multiple 2°C scenarios. Our leadership in minimizing GHG emissions further enhances our ability to comply with new policies and practices. Our capital discipline prevents us from investing in assets that are unlikely to recover their capital costs. Any impacts that do affect the ability to produce reserves would be reflected under SEC regulations governing the reporting of reserves.

  1. Previously known as the “New Policies Scenario.”
  2. Global Energy Review 2020 IEA and Gas 2020 June 2020 IEA.
  3. 17 CFR § 210.4-10(a)(22) (emphasis added). Undrilled locations must have a development plan with drilling scheduled within five years. 17 CFR § 210.4-10(a)(31)(ii).
  4. IHS Markit, IHS Markit, Do Investments in Oil and Gas Constitute Systemic Risk?
  5. Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities, Task Force on Climate Related Disclosures.
  6. IEA, The Oil and Gas Industry in Energy Transitions, p. 84.
  7. Scenario analysis prepared for SWN by GaffneyCline, an independent, international oil and gas consultancy providing technical, commercial, and strategic advisory services.
  8. Ibid., p. 99.
  9. https://www.iea.org/reports/world-energy-investment-2020/fuel-supply.
  10. Ibid.