POINTS TO COVER UNCONVENTIONAL OIL AND GAS AND THE SHALE REVOLUTION: GAME CHANGER 4/16/2014. If we don t screw it up! Context Implications Risks

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1 UNCONVENTIONAL OIL AND GAS AND THE SHALE REVOLUTION: GAME CHANGER If we don t screw it up! POINTS TO COVER Context Implications Risks April 11 1

2 You can always count on Americans to do the right thing -- After they ve tried everything else. April 11 2

3 CONTEXT US FOREIGN POLICY DRIVEN BY THESE EVENTS FOR THE PAST 40 YEARS April 11 3

4 WE HAD TO ENDURE MANY DIFFICULTIES BACK TO THE FUTURE Iranian oil is off the market Libya production is virtually zero Egyptian oil output is down Iraqi output is reduced April 11 4

5 BACK TO THE FUTURE Iranian oil is off the market Libya production is virtually zero Iraqi output is reduced Egyptian output is reduced 4.00 Annual Motor Gasoline Regular Grade Retail Price dollars per gallon Nominal Price Real Price (Jan 2014 $) Forecast EIA Short-Term Energy Outlook, January 2014 April 11 5

6 SO, WHAT S GOING ON? The improving economy? The large reduction in the balance of trade deficit? The US manufacturing renaissance? US Carbon Footprint down to early 1990 s level? ANSWER: DOMESTIC OIL AND GAS PRODUCTION FROM SHALE. April 11 6

7 CONTEXT Directional Change in the Oil and Gas Industry April 11 7

8 E&P CAPEX MOVED ONSHORE Offshore Onshore WHY THE SHIFT TO ONSHORE? Cost Production costs versus price for produced product Permitting Lack of access to promising offshore fields Risk profile Reaction to Government Policy April 11 8

9 WHY THE SHIFT TO ONSHORE? Cost Production costs versus price for produced product Lack of access to promising offshore fields Risk profile Reaction to Government Policy WHO DROVE THE MOVE ONSHORE? Not the Majors Shell, BP, ExxonMobil, Chevron, etc. Small, Independent Producers Continental Resources, EOG, Whiting Oil, Marathon, Range Resources, etc. Why is that important? Appetite for risk Access to capital April 11 9

10 WHAT IS THE DIFFERENCE BETWEEN CONVENTIONAL AND UNCONVENTIONAL? April 11 10

11 TECHNOLOGY Moore s Law Analytics Telemetry Remote monitoring Making mechanical devises smart (SCADA) ENABLING TECHNOLOGIES: 3 D SEISMIC April 11 11

12 ROTARY STEERABLE DRILLING HYDRAULIC FRACTURING April 11 12

13 HOW DOES HYDRAULIC FRACTURING WORK? WHAT IS THIS STUFF THEY FRACK WITH? April 11 13

14 IMPLICATIONS US OIL PRODUCTION ON THE RISE April 11 14

15 US OIL PRODUCTION ON THE RISE US OIL PRODUCTION ON THE RISE April 11 15

16 DROP IN CRUDE IMPORTS HELPING BALANCE OF TRADE REDUCING THE TRADE GAP The US produced 6.5 million barrels of oil per day in 2012, according to the US Energy Information Administration (EIA). That is expected to rise to 9.6 million barrels of oil per day in 2019, largely on account of new drilling techniques that tap oil in low-permeability rock formations. Production will level off at or above about 7.5 million barrels per day through 2040, EIA projects. The new oil and gas production helped lower the trade gap by 12.9 percent to $34.3 billion in November. Source: Christian Science Monitor, 11/13 April 11 16

17 JOB GROWTH (thousands) Source: Bureau of Labor Statistics WHERE ARE THE OPPORTUNITIES? NORTH AMERICA April 11 17

18 WHERE ARE THE OPPORTUNITIES? NORTH AMERICA WHERE ARE THE OPPORTUNITIES? GLOBAL April 11 18

19 WHERE ARE THE OPPORTUNITIES? GLOBAL TOP 10 COUNTRIES WITH TECHNICALLY RECOVERABLE SHALE OIL AND GAS RESOURCES Rank Country Shale Oil (billions barrels) Rank Country Shale Gas (trillion cubic feet) 1 Russia 75 1 China 1,115 2 United States 58 2 Argentina China 32 3 Algeria Argentina 27 4 United States Libya 26 5 Canada Australia 18 6 Mexico Venezuela 13 7 Australia Mexico 13 8 South Africa Pakistan 9 9 Russia Canada 9 10 Brazil 245 Source: Source: EIA EIA World Total 345 World Total 7,299 April 11 19

20 TOP 10 COUNTRIES WITH TECHNICALLY RECOVERABLE SHALE OIL AND GAS RESOURCES Rank Country Shale Oil (billions barrels) Rank Country Shale Gas (trillion cubic feet) 1 Russia 75 1 China 1,115 2 United States 58 2 Argentina China 32 3 Algeria Argentina 27 4 United States Libya 26 5 Canada Australia 18 6 Mexico Venezuela 13 7 Australia Mexico 13 8 South Africa Pakistan 9 9 Russia Canada 9 10 Brazil 245 World Total 345 World Total 7,299 Source: EIA TOP 10 COUNTRIES WITH TECHNICALLY RECOVERABLE SHALE OIL AND GAS RESOURCES Rank Country Shale Oil (billions barrels) Rank Country Shale Gas (trillion cubic feet) 1 Russia 75 1 China 1,115 2 United States 58 2 Argentina China 32 3 Algeria Argentina 27 4 United States Libya 26 5 Canada Australia 18 6 Mexico Venezuela 13 7 Australia Mexico 13 8 South Africa Pakistan 9 9 Russia Canada 9 10 Brazil 245 World Total 345 World Total 7,299 Source: EIA April 11 20

21 TOP 10 COUNTRIES WITH TECHNICALLY RECOVERABLE SHALE OIL AND GAS RESOURCES Rank Country Shale Oil (billions barrels) Rank Country Shale Gas (trillion cubic feet) 1 Russia 75 1 China 1,115 2 United States 58 2 Argentina China 32 3 Algeria Argentina 27 4 United States Libya 26 5 Canada Australia 18 6 Mexico Venezuela` 13 7 Australia Mexico 13 8 South Africa Pakistan 9 9 Russia Canada 9 10 Brazil 245 World Total 345 World Total 7,299 Source: EIA GEOPOLITICAL IMPLICATIONS Less dependent on Middle East and North Africa for oil Reduced resource competition among superpowers Europe could be less dependent on Russia for natural gas April 11 21

22 GEOPOLITICAL IMPLICATIONS GEOPOLITICAL IMPLICATIONS April 11 22

23 ENVIRONMENTAL IMPLICATIONS ENVIRONMENTAL IMPLICATIONS April 11 23

24 SO WHO BENEFITS? GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream April 11 24

25 GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream April 11 25

26 GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream OTHER INDUSTRIES LIKELY TO BENEFIT Steel Ship Building Plastics Mining April 11 26

27 RISKS More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. April 11 27

28 Let us pray we have the wisdom to choose correctly. RISKS Risk 1 April 11 28

29 RISKS Risk 1 Risk 2 METHANE EMISSIONS WSJ article March 28, 2014 April 11 29

30 RISKS Risk 1 Risk 2 Risk 3 UNINTENDED CONSEQUENCES April 11 30

31 RISKS Risk 4 Activists RISKS Risk 4 Activists Risk 5 Oil Prices April 11 31

32 EIA Short-Term Energy Outlook,January 2014 Annual Average Imported Crude Oil Price Return to Contents Consumer Price Imported Crude Oil Price ($/barrel) Year Index ( =1) Nominal Real Base CPI (1/2014) EIA Short-Term Energy Outlook, January 2014 Forecast / estimated values shown in blue Real Price (Jan 2014 $) See Notes and Sources for more information EIA Short-Term Energy Outlook,January 2014 Annual Average Imported Crude Oil Price Return to Contents Consumer Price Imported Crude Oil Price ($/barrel) Year Index ( =1) Nominal Real Base CPI (1/2014) EIA Short-Term Energy Outlook, January 2014 Forecast / estimated values shown in blue Real Price (Jan 2014 $) See Notes and Sources for more information 4/16/2014 Annual Imported Crude Oil Price dollars per barrel Nominal Price Real Price (Jan 2014 $) Forecast EIA Short-Term Energy Outlook, January 2014 Annual Imported Crude Oil Price dollars per barrel Nominal Price Real Price (Jan 2014 $) Economic Threshold for US Unconventional Oil Forecast EIA Short-Term Energy Outlook, January 2014 April 11 32

33 MISGUIDED GOVERNMENT POLICY Political Pandering Misunderstanding economics The best argument against democracy... April 11 33

34 Is a five-minute discussion with the average voter. QUESTIONS April 11 34