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
You can always count on Americans to do the right thing -- After they ve tried everything else. April 11 2
CONTEXT US FOREIGN POLICY DRIVEN BY THESE EVENTS FOR THE PAST 40 YEARS April 11 3
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
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 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 EIA Short-Term Energy Outlook, January 2014 April 11 5
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
CONTEXT Directional Change in the Oil and Gas Industry April 11 7
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
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
WHAT IS THE DIFFERENCE BETWEEN CONVENTIONAL AND UNCONVENTIONAL? April 11 10
TECHNOLOGY Moore s Law Analytics Telemetry Remote monitoring Making mechanical devises smart (SCADA) ENABLING TECHNOLOGIES: 3 D SEISMIC April 11 11
ROTARY STEERABLE DRILLING HYDRAULIC FRACTURING April 11 12
HOW DOES HYDRAULIC FRACTURING WORK? WHAT IS THIS STUFF THEY FRACK WITH? April 11 13
IMPLICATIONS US OIL PRODUCTION ON THE RISE April 11 14
US OIL PRODUCTION ON THE RISE US OIL PRODUCTION ON THE RISE April 11 15
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
JOB GROWTH (thousands) Source: Bureau of Labor Statistics WHERE ARE THE OPPORTUNITIES? NORTH AMERICA April 11 17
WHERE ARE THE OPPORTUNITIES? NORTH AMERICA WHERE ARE THE OPPORTUNITIES? GLOBAL April 11 18
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 802 3 China 32 3 Algeria 707 4 Argentina 27 4 United States 665 5 Libya 26 5 Canada 573 6 Australia 18 6 Mexico 545 7 Venezuela 13 7 Australia 437 8 Mexico 13 8 South Africa 390 9 Pakistan 9 9 Russia 285 10 Canada 9 10 Brazil 245 Source: Source: EIA EIA World Total 345 World Total 7,299 April 11 19
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 802 3 China 32 3 Algeria 707 4 Argentina 27 4 United States 665 5 Libya 26 5 Canada 573 6 Australia 18 6 Mexico 545 7 Venezuela 13 7 Australia 437 8 Mexico 13 8 South Africa 390 9 Pakistan 9 9 Russia 285 10 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 802 3 China 32 3 Algeria 707 4 Argentina 27 4 United States 665 5 Libya 26 5 Canada 573 6 Australia 18 6 Mexico 545 7 Venezuela 13 7 Australia 437 8 Mexico 13 8 South Africa 390 9 Pakistan 9 9 Russia 285 10 Canada 9 10 Brazil 245 World Total 345 World Total 7,299 Source: EIA April 11 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 802 3 China 32 3 Algeria 707 4 Argentina 27 4 United States 665 5 Libya 26 5 Canada 573 6 Australia 18 6 Mexico 545 7 Venezuela` 13 7 Australia 437 8 Mexico 13 8 South Africa 390 9 Pakistan 9 9 Russia 285 10 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
GEOPOLITICAL IMPLICATIONS GEOPOLITICAL IMPLICATIONS April 11 22
ENVIRONMENTAL IMPLICATIONS ENVIRONMENTAL IMPLICATIONS April 11 23
SO WHO BENEFITS? GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream April 11 24
GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream April 11 25
GEARS AND BEARINGS Upstream Oil and Gas Midstream Downstream OTHER INDUSTRIES LIKELY TO BENEFIT Steel Ship Building Plastics Mining April 11 26
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
Let us pray we have the wisdom to choose correctly. RISKS Risk 1 April 11 28
RISKS Risk 1 Risk 2 METHANE EMISSIONS WSJ article March 28, 2014 April 11 29
RISKS Risk 1 Risk 2 Risk 3 UNINTENDED CONSEQUENCES April 11 30
RISKS Risk 4 Activists RISKS Risk 4 Activists Risk 5 Oil Prices April 11 31
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 (1982-84=1) Nominal Real 1969 0.367 2.80 17.90 1970 0.388 2.96 17.90 1971 0.405 3.17 18.37 1972 0.418 3.22 18.07 1973 0.444 4.08 21.56 1974 0.493 12.52 59.59 1975 0.538 13.95 60.80 1976 0.569 13.48 55.57 1977 0.606 14.53 56.23 1978 0.652 14.57 52.40 1979 0.726 21.57 69.74 1980 0.824 33.86 96.43 1981 0.909 37.10 95.73 1982 0.965 33.57 81.59 1983 0.996 29.31 69.07 1984 1.039 28.88 65.19 1985 1.076 26.99 58.86 1986 1.097 13.93 29.81 1987 1.136 18.14 37.46 1988 1.183 14.60 28.97 1989 1.239 18.07 34.21 1990 1.307 21.73 39.03 1991 1.362 18.73 32.27 1992 1.403 18.21 30.45 1993 1.445 16.13 26.20 1994 1.482 15.54 24.60 1995 1.524 17.14 26.39 1996 1.569 20.62 30.84 1997 1.605 18.49 27.02 1998 1.630 12.07 17.37 1999 1.666 17.27 24.33 2000 1.722 27.72 37.77 2001 1.770 21.99 29.15 2002 1.799 23.71 30.93 2003 1.840 27.73 35.36 2004 1.889 35.89 44.58 2005 1.953 48.89 58.74 2006 2.016 59.05 68.74 2007 2.073 67.19 76.03 2008 2.153 92.57 100.91 2009 2.146 59.04 64.56 2010 2.181 75.87 81.63 2011 2.249 102.65 107.07 2012 2.296 101.09 103.30 2013 2.329 99.63 100.35 1 2014 2.368 97.37 96.47 1 2015 2.409 93.62 91.18 1 Base CPI (1/2014) 2.346 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 (1982-84=1) Nominal Real 1969 0.367 2.80 17.90 1970 0.388 2.96 17.90 1971 0.405 3.17 18.37 1972 0.418 3.22 18.07 1973 0.444 4.08 21.56 1974 0.493 12.52 59.59 1975 0.538 13.95 60.80 1976 0.569 13.48 55.57 1977 0.606 14.53 56.23 1978 0.652 14.57 52.40 1979 0.726 21.57 69.74 1980 0.824 33.86 96.43 1981 0.909 37.10 95.73 1982 0.965 33.57 81.59 1983 0.996 29.31 69.07 1984 1.039 28.88 65.19 1985 1.076 26.99 58.86 1986 1.097 13.93 29.81 1987 1.136 18.14 37.46 1988 1.183 14.60 28.97 1989 1.239 18.07 34.21 1990 1.307 21.73 39.03 1991 1.362 18.73 32.27 1992 1.403 18.21 30.45 1993 1.445 16.13 26.20 1994 1.482 15.54 24.60 1995 1.524 17.14 26.39 1996 1.569 20.62 30.84 1997 1.605 18.49 27.02 1998 1.630 12.07 17.37 1999 1.666 17.27 24.33 2000 1.722 27.72 37.77 2001 1.770 21.99 29.15 2002 1.799 23.71 30.93 2003 1.840 27.73 35.36 2004 1.889 35.89 44.58 2005 1.953 48.89 58.74 2006 2.016 59.05 68.74 2007 2.073 67.19 76.03 2008 2.153 92.57 100.91 2009 2.146 59.04 64.56 2010 2.181 75.87 81.63 2011 2.249 102.65 107.07 2012 2.296 101.09 103.30 2013 2.329 99.63 100.35 1 2014 2.368 97.37 96.47 1 2015 2.409 93.62 91.18 1 Base CPI (1/2014) 2.346 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 120 110 100 90 80 70 60 50 40 30 20 10 Nominal Price Real Price (Jan 2014 $) Forecast 0 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 EIA Short-Term Energy Outlook, January 2014 Annual Imported Crude Oil Price dollars per barrel 120 110 100 90 80 70 60 50 40 30 20 10 Nominal Price Real Price (Jan 2014 $) Economic Threshold for US Unconventional Oil Forecast 0 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 EIA Short-Term Energy Outlook, January 2014 April 11 32
MISGUIDED GOVERNMENT POLICY Political Pandering Misunderstanding economics The best argument against democracy... April 11 33
Is a five-minute discussion with the average voter. QUESTIONS April 11 34