RESEARCH & KNOWLEDGE MANAGEMENT. Oil & Gas Updates: US Shale Industry

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1 RESEARCH & KNOWLEDGE MANAGEMENT FEBRUARY 218

2 Key highlights US crude oil and condensate proved reserves amounted to 35.2bln barrels (-12% YoY) in 215, based on the latest available data. The share of tight oil stood at 32.9% of all US crude oil and condensate proved reserves or at 11.bln barrels (-13% YoY). Most reserves are located at Bakken play (5bln barrels or 14% of total) and Eagle Ford (4.3bln barrels or 12%). The share of US tight oil production was estimated at 51% of total US crude output in November 217, 4pp higher than in 21. US crude oil production continued to increase by 4.8% YtD and 14.2% YoY to 1.3mln bpd as of 2 February 218 on the back of rising average weekly oil prices to USD5pb (.5% YtD and 22.5% YoY). US tight supply accounted for 84% of the growth of US output between November 21 and November 217. Average cash cost of production of US shale amounted to USD23.4pb in 21, which was higher than that of the US non-shale at USD21.pb, according to data from Rystad Energy. On the US shale basins breakdown, Bakken had the lowest break-even price at USD29pb in 21, while Permian Midland had the highest price at USD39pb. Most US shale oil basins were able to reduce their break-even prices by 5% since 213 due to lower extraction costs as a result of technology advancement, systematic application of high-grading and other factors. Average cash cost 1 by country, USD pb (21) Saudi Arabia Iran Iraq Russia Indonesia US non-shale Norway US shale Canada Venezuela Nigeria Brazil UK 9, 9,1 1, 19,2 19,7 21, 21,3 23,4 2, 27, 29, Source: Rystad Energy, US oil and gas reserves study, EY 217, Samruk-Kazyna 35, 44, Break-even prices 2 across key US shale oil basins, USD/pb (213-21) Permian Midland ; USD39 Eagle Ford; USD38 Niobrara; USD34 Permian Delaware; USD33 Bakken; USD Bakken Eagle Ford Niobrara Permian Delaware Permian Midland US shale oil and gas companies are actively drilling new wells, as a result of which drilled but uncompleted (DUC) oil and gas wells across the seven largest shale plays increased to about 7,5 as of November 217, according to EIA data (2, higher YoY). The significant DUC inventory implies a greater flexibility of US producers, i.e. more responsive to price increases. In 218, the US production growth is expected to be strong at.93mln bpd to 1.2mln bpd, and to slow down to.mln bpd in 219. Higher growth is attributable to higher oil prices, increased investments in US oil, improved efficiency and high drilling activity in 217. Expected tight oil production growth at 1.1mln bpd in 218, will be partially offset by output decline in other onshore fields. Higher US output will limit further oil price growth and remains a key concern in Cash costs include gross taxes, production costs, administrative and transportation costs, and capital spending. 2 Break-even price is the oil price needed to profitably develop a US shale oil well. 2

3 US crude oil reserves According to the latest Energy Information Administration (EIA) data, US crude oil and condensate proved reserves amounted to 35.2bln barrels (-12% YoY) in 215. The decline in reserves was due to the downward revision of proved reserves 3 by operators because of a 47% drop in oil prices in 215. The largest revisions were in Texas (-1.7bln barrels), North Dakota (-1.bln barrels) and Alaska (-.7bln barrels). The share of tight oil stood at 32.9% of all US crude oil and condensate proved reserves or at 11.bln barrels (-13% YoY). Most reserves are located at Bakken play (5bln barrels or 14% of total) and Eagle Ford (4.3bln barrels or 12%). US crude oil and condensate proved reserves, bln barrels US tight oil play crude oil and condensate proved reserves, mln barrels Play Bakken/Three Forks 5,972 5,3 Eagle Ford 5,172 4,295 Bone spring, Wolfcamp Niobrara Marcellus Barnett US tight oil 13,35 11,2 % of total 33.5% 32.9% 2 Source: EIA, Samruk-Kazyna In 21, crude oil reserves of 5 largest companies amounted to 23.9bln barrels (-2% YoY), based on the latest available data. These companies made substantially lower revisions in 21 compared to 215. The largest downward revision of crude oil reserves was recorded by Exxon Mobil (34mln barrels) and ConocoPhillips (182mln barrels), while Antero Resources and Chevron reported the largest upward revision of their reserves by 278mln barrels and 19mln barrels, respectively. US companies oil reserves, mln barrels Company YoY change Exxon Mobil 2,32 2,417 (215) ConocoPhillips 1,938 1,728 (21) BP plc 1,8 1,2 (18) EOG Resources 1,47 1, Chevron 1,38 1,412 2 Occidental Petroleum 1,11 1, Antero Resources Anardako Petroleum (41) Total of 5 companies 24,415 23,917 (498) Source: US oil and gas reserves study, EY Revisions to reserves occur primarily when operators change their estimates of what they are able to economically produce from the properties they operate using existing technology and current economic conditions. Thus, current prices are critical in estimating economically producible reserves. 3

4 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan- Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-1 Jan-17 Jan-13 Apr-13 Aug-13 Nov-13 Feb-14 Jun-14 Sep-14 Jan-15 Apr-15 Aug-15 Nov-15 Mar-1 Jun-1 Sep-1 Jan-17 Apr-17 Aug-17 Nov-17 Jan-13 Apr-13 Aug-13 Dec-13 Mar-14 Jul-14 Nov-14 Feb-15 Jun-15 Oct-15 Jan-1 May-1 Sep-1 Dec-1 Apr-17 Aug-17 Dec-17 US supply growth mostly driven by shale US crude oil production continued to increase by 4.8% YtD and 14.2% YoY to 1.3mln bpd as of 2 February 218 on the back of rising average weekly oil prices to USD5pb (.5% YtD and 22.5% YoY). The rapid recovery in US output is one of the factors making market rebalancing slower. Changes in the US crude supply partially follow crude oil price dynamics; particularly US tight oil production is sensitive to oil price volatility. The sharp drop in oil prices to its lowest level in February 21 was followed by a significant decline in US supply to 8.45mln bpd in July 21. Meantime, US energy companies oil rig count increased by 18 YtD and 182 YoY bringing the total count to 75 as of 2 February 218. The total count was still two times lower than its highest level of 1,595 recorded in October 214. The pace at which producers have been adding drilling rigs slowed down in 2H17 compared with the period of 2H1 1H17. However, US production will continue to increase as the lagged impact of earlier increases in the rig count filter through. US crude oil production and oil prices US crude oil production and rig count Weekly US crude oil (mln bpd) WTI, USD pb (rhs) Weekly US crude oil (mln bpd) US oil rig count (rhs) Source: EIA, Baker Hughes, Samruk-Kazyna The share of US tight oil production was estimated at 51% in November 217, 4pp higher than in 21. Most US tight oil comes from Bakken (1.17mln bpd), Eagle Ford (1.12mln bpd), Spraberry (1.2mln bpd) and Wolfcamp/Bonespring (1.mln bpd). These plays accounted for 81% of the growth of US shale output between November 21 and November 217. Tight oil production, mln bpd and its share as of total US crude, %, 5, 4, 3, 2, 1, Utica (OH, PA & WV) Delaware (TX & NM Permian) Yeso & Glorieta (TX & NM Permian) Eagle Ford (TX) Bakken (ND & MT) Spraberry (TX & NM Permian) Bonespring (TX & NM Permian) Wolfcamp (TX & NM Permian) Niobrara-Codell (CO, WY) Haynesville (LA, TX) Marcellus (PA,WV,OH &NY) Woodford (OK) Granite Wash (OK & TX) Austin Chalk (LA & TX) Monterey (CA) % of total US crude (rhs) % 5% 4% 3% 2% 1%, % Source: EIA, Baker Hughes, Samruk-Kazyna 4

5 Jan-1 Feb-1 Apr-1 May-1 Jul-1 Sep-1 Oct-1 Dec-1 Jan-17 Mar-17 May-17 Jun-17 Aug-17 Sep-17 Nov-17 Jan-18 Approximately 3% of US crude oil is domestically refined and the rest is exported. In January 218, US crude oil export more than tripled YoY to 1.7mln bpd. Canada used to be the largest export destination of the US crude oil export until the removal of restrictions, but its share declined and the US started to export to other countries. Most of US crude oil was still exported to Canada (13%) and Mexico (17%). Other largest countries that import most of US crude oil are China (7%) and Brazil (%). According to EIA data, exports to Asian countries stood at about 35% in the 8M17, while to European countries at 22%. Weekly US crude oil export and import*, bpd Weekly US crude oil export Weekly US crude oil import (rhs) Export destinations ( barrels) Rest of world Netherlands Japan Brazil China Mexico Canada M17 11M1 *We use 4-month moving average to smooth fluctuations. Source: EIA, Samruk-Kazyna Break-even prices across key US shale oil basins According to data from Rystad Energy, average cash cost of production of US shale amounted to USD23.4pb in 21, which was higher than that of the US non-shale at USD21.pb. The cheapest average cost to produce oil was at Saudi Arabia at USD9.pb, followed by other OPEC countries such as Iran (USD9.1pb) and Iraq (USD1.pb). The main difference between cash cost structure of Saudi Arabia and US oil producers is the lack of taxes in Saudi Arabia, while its capital spending and production costs are twice times lower compared with the US. Average cash cost 4 by country, USD pb (21) Saudi Arabia & US shale cash costs, USD pb (21) Saudi Arabia Iran Iraq Russia Indonesia US non-shale Norway US shale Canada Venezuela Nigeria Brazil UK 9, 9,1 1, 19,2 19,7 21, 21,3 23,4 2, 27, 29, 35, 44, Source: Rystad Energy, the Wall Street Journal, Samruk-Kazyna ,5 3, 2,5 Saudi Arabia Gross taxes Production costs 7, 5,9 3,5,4 US shale Admin. & transport. costs Capital spending 4 Cash costs include gross taxes, production costs, administrative and transportation costs, and capital spending. 5

6 On the US shale basins breakdown, Bakken had the lowest break-even price at USD29pb in 21, while Permian Midland had the highest price at USD39pb. Most of US shale oil basins were able to reduce their break-even prices by 5% since 213 due to several factors, such as: Lower extraction costs due to improvements in technology; Increased productivity gains due to systematic application of high-grading 5 ; Significant decline in the cost of oilfield services and proppants such as frac sand; Usage of longer laterals to maximize extraction from a single place; Drilling times decreased due to rig mobility; More powerful equipment usage (drill bits, sensors, pumps and etc.); Improved logistics. On company breakdown, the median of production costs of 5 US oil & gas companies amounted to USD1.8pb in 21. Most of large companies exceeds this level, such as Chevron (USD18.7pb), Exxon Mobil (USD15.5pb), ConocoPhilips (USD18pb), while top one of the top shale oil companies like Anadarko Petroleum (USD8.pb) and Antero Resources (USD8.9pb) had lower production costs. Thirty E&Ps account for about 4mln bpd or 8% of current tight oil production. Average production costs by US oil & gas majors, USD/pb (21) Anadarko Petroleum Antero Resources EOG Resources Chesapeake Energy BP BHP Billiton Exxon Mobil ConocoPhillips Chevron Shell 8, 8,9 Median=1.8 12,7 12,9 13,1 13,4 Source: Rystad Energy, US oil and gas reserves study, EY 217, Samruk-Kazyna 15,5 18, 18,7 21, Break-even prices 7 across key US shale oil basins, USD/pb (213-21) Permian Midland ; USD39 Eagle Ford; USD38 Niobrara; USD34 Permian Delaware; USD33 Bakken; USD Bakken Eagle Ford Niobrara Permian Delaware Permian Midland US oil and gas companies are actively drilling new wells, as a result of which drilled but uncompleted (DUC) oil and gas wells across the seven largest shale plays increased to about 7,5 as of November 217, according to EIA data. This estimated number of uncompleted wells was 2, higher YoY. The significant DUC inventory implies a greater flexibility of US producers, i.e. more responsive to price increases. 5 The process of selecting and developing the most profitable assets while keeping an inventory of drilled but uncompleted wells that would be retaken when prices go up. Production costs are calculated as production costs, including production taxes, and transportation costs divided by production. 7 Break-even price is the oil price needed to profitably develop a US shale oil well.

7 e 218f 219f Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-1 Jun-1 Sep-1 Dec-1 Mar-17 Jun-17 Sep-17 Dec-17 Drilled but uncompleted oil and gas wells Source: EIA, Samruk-Kazyna US production outlook 218 In 218, the US production growth is expected at.93mln bpd to 1.2mln bpd. US output growth is expected to slow down to.mln bpd in 219. Expected tight oil production growth at 1.1mln bpd in 218, will be partially offset by output decline in other onshore fields. The Permian alone contributes two-third of the increase in 218 and one-third in 219. The IEA forecasts US supply to grow by.3 bpd to 1.4mln bpd in 218, while OPEC predicts it to increase by.87mln bpd to 1.14mln bpd. In the long-term, tight oil production is expected to almost double from 5.1mln bpd to around 9.5mln bpd in the mid-22s. Higher growth is attributable higher oil prices, increased investments in US oil, improved efficiency and high drilling activity in 217. Higher US output will limit further oil price growth and remains a key concern in 218. US crude oil production, mln bpd ( f) Tight oil Other L48 onshore Alaska Gulf of Mexico US quarterly oil rig count vs. crude oil production ( f) % 1 2 4% 2% % -2% Active drilling activity in 2H1-1H17-4% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q US oil output, QoQ mln bpd US oil rig count quarterly (RHS) Source: Wood Mackenzie, Samruk-Kazyna 7

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