Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom. Web Briefing December 9, 2014

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1 Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom Web Briefing December 9, 214 J. David Hughes Post Carbon Institute Global Sustainability Research Inc.

2 About the Report: - Top twelve U.S. shale gas and oil plays were analyzed 82% of EIA projected oil and 88% of EIA projected gas production through 24 - Report is based on all well production data current through mid Key Fundamentals were evaluated at the play level and at the county level within plays (well- and field-decline rates, quality, spacing, and number of potential wells) - Scenarios of future production rates and cumulative recovery through 24 were developed based on various drilling rate scenarios and compared to EIA forecasts 2

3 Key Findings: - Shale Gas from the plays assessed will likely peak before 22 and produce 4% less gas than the EIA estimates through 24 - Gas production from these plays in 24 will be at about one-third of the rate estimated by the EIA - Oil production from the top two tight oil plays with 62% of current production will peak by Production from the top two tight oil plays in 24 will be less than a tenth of that projected by the EIA - Meeting EIA tight oil forecasts through 24 would require triple the estimated production of the top two plays from other plays 3

4 Key Findings (Continued): - Meeting the shale gas forecasts in this report will require drilling some 13, additional wells by 24 at a cost of nearly $1 trillion - Meeting the tight oil forecasts in this report would require a similar investment for a total of about $2 trillion - Prices will have to go considerably higher to justify these expenditures much higher than EIA projects - The EIA forecasts are extremely optimistic, typically assuming between 8 and 1% of known reserves and estimated resources will be produced by 24 - Planning large scale exports of LNG and potentially crude oil is ill-advised given declining production as soon as 22 4

5 A Complete List of Key Findings Talking Points Are Available at: 5

6 Gas Production (Billion cubic feet per day) U.S. Shale Gas Production by Play, Marcellus Eagle Ford Bakken Utica Rest of US Antrim Woodford Fayetteville Barnett Haynesville 5 Legacy Plays Collectively Peaked in August 212 and are now down 21% Marcellus 15 1 Current Production Top 2 Plays = 48% Top 5 Plays = 78% Barnett Year Haynesville Hughes GSR Inc, 214 (data from EIA Natural Gas Weekly Update, September 24, 214 ) 6

7 The Shale Play Life Cycle Discovery followed by leasing frenzy. Drilling boom follows to meet held-by-production lease requirements. Sweet spots identified, targeted and drilled off. Companies always drill their best locations first. Production rises rapidly and is maintained for cash-flow despite potentially uneconomic full-cycle costs. Sweet spots become saturated and well quality and field production decline. Plays like the Haynesville become middle aged after just five years. Hughes GSR Inc, 214 7

8 Gas Production (Billion cubic feet per day) SHALE PLAY LIFE CYCLE - Haynesville Gas Production and Number of Producing Wells, Discovery Peak January 212 Gas Production Number of Wells Drilling Boom Leasing Boom Decline Production Down 46% Number of Producing Wells Year Hughes GSR Inc, 214 (data from Drillinginfo, August, 214, three month trailing moving average) 8

9 Trillion Cubic Feet per Year U.S. Natural Gas Supply Projection by Source, 21-24, EIA Reference Case LNG Imports Canada Imports Shale Gas Alaska Coalbed Methane Tight Gas Associated Conventional Offshore Shale Gas (+15% ) 67% increase in production by 24 U.S. domestic consumption Alaska 53% of 24 Production 1 Tight Gas 5 Associated Conventional Offshore Hughes GSR Inc, 214 Year (data from EIA Annual Energy Outlook 214, Tables 13 and 14, 9

10 Barnett Play Well Quality by Initial Gas Production Hughes GSR Inc, 214 (map by John Van Hoesen based on data from Drillinginfo, August, 214) 1

11 Gas Production (Billion cubic feet per day) 7 Barnett Gas Production and Number of Producing Wells, Gas Production Number of Wells Peak December 211 Production Down 18% Number of Producing Wells Year Hughes GSR Inc, 214 (data from Drillinginfo, August, 214, three month trailing moving average) 11

12 Gas Production (Thousand cubic feet /day) Barnett Average Gas Well Decline Curves by Well Type Vertical/Directional Wells Horizontal Wells Barnett Average First Year = 56% Second Year = 27% Third Year = 23% Fourth Year = 2% 3-Year Decline = 75% Months on Production Hughes GSR Inc, 214 (data from Drillinginfo, August, 214) 12

13 Gas Production (Billion cubic feet/day) Barnett Field Decline Gas Production from Horizontal Wells Drilled Prior to Total Gas Production Number of pre-213 Wells First Year Field Decline = 23% Number of Producing Wells Year Hughes GSR Inc, 214 (data from Drillinginfo, August, 214) 13

14 398 Wells 3789 Wells 1424 Wells 1567 Wells 1432 Wells 2952 Wells Billion cubic feet per Well Estimated Ultimate Recovery per Horizontal Well By County 3 EIA range in EUR = bcf % to 58% is Recovered in the first 4 Years Tarrant Johnson Denton Wise Parker Other 19 Counties County Hughes GSR Inc, 214 (data from Drillinginfo, August, 214) 14

15 Tarrant County Well Footprint 1 Mile Hughes GSR Inc, 214 (data from Drillinginfo, February, 214) 15

16 Average First Twelve Month Production (Thousand cubic feet/day) Barnett Gas Well Productivity by Well Type, Average Production over First Twelve Months, Peak well productivity Horizontal Wells were nearly 8 times as productive as Vertical/Directional Wells in 213 Average Well Down 17% from 211 peak Horizontal Wells Barnett Average Vertical/Directional Wells 2 Hughes GSR Inc, Year 16 (data from Drillinginfo, August, 214)

17 Gas Production (Billion cubic feet per day) Barnett Gas Production Forecast in various Drilling Rate Scenarios through Peak 212 Without Quintupling Drilling Peak 216 if Drilling rate Quintuples Most likely Production Triple drilling rate Production Low drilling rate Production Quintuple drilling rate Production Most likely Wells 6/y declining to 5/y Triple drilling rate Wells 12/y declining to 6/y Low drilling rate Wells constant at 4/y Quintuple drilling rate Wells 2/y declining to 1/y Year Recovery to date 15.6 tcf Ultimate Recovery tcf by Hughes GSR Inc, 214 (data from Drillinginfo, August, 214, Number of Producing Wells 17

18 Gas Production (Billion cubic feet per day) Barnett Gas Production Forecast in the Most Likely Drilling Rate Scenario vs EIA AEO214 projection through Peak late 211 In Most Likely Drilling Scenario Recovery to date 15.6 tcf Ultimate Recovery 39.2 tcf by 24 EIA AEO214 Forecast Most likely Production Most likely Wells EIA Cumulative Production to 24 = 56.4 tcf an Extra 17.2 tcf Number of Producing Wells Year Hughes GSR Inc, 214 (data from Drillinginfo, August, 214, 18

19 Average Well Production (mcf/day) Major Shale Play Well Quality in 213 Average and Sweet Spots First 12 month Production Rate Average Sweet Spot Bakken Barnett Eagle Ford Fayetteville Haynesville Marcellus Woodford County Hughes GSR Inc, 214 (data from Drillinginfo, October, 214) 19

20 Gas Production (Bilion cubic feet/per day) Most Likely Drilling Rate Gas Production from Major Shale Plays through Recovery to date 47.5 tcf Ultimate Recovery tcf by 24 Peak 216 Marcellus Bakken Fayetteville Haynesville Most likely Wells Eagle Ford Barnett Haynesville Year Marcellus Eagle Ford Woodford Barnett EIAWeekly Update Hughes GSR Inc, 214 (data from Drillinginfo, September, 214, Number of Producing Wells 2

21 Gas Production (Bilion cubic feet/per day) Most Likely Drilling Rate Gas Production from Major Shale Plays through 24 compared to EIA Shale Gas Forecast EIA other plays EIA AEO214 additional for report plays Plays covered in this report with 6% shrinkage EIA AEO214 forecast for report plays EIA All shale plays Weekly Update EIA AEO214 Forecast for All Plays Peak 216 EIA other plays 49.6 tcf EIA Forecast is an Additional tcf by 24 from Plays in this Report 2 1 Plays in this Report Recovered to date 47.5 tcf Recovery tcf Year Hughes GSR Inc, 214 (EIA forecast from Annual Energy Outlook 214; data from Drillinginfo, September, 214; 6% shrinkage applied) 21

22 Million Barrels per Day 12 1 U.S. Crude Oil Production Projection by Source and Region (EIA 214 Reference Case) Peak Production 219 Alaska Shale/Tight Oil Lower-48 Offshore Year Alaska Onshore EOR Onshore Shale/Tight Oil Lower-48 Onshore Conventional Lower-48 Offshore Lower-48 Onshore Conventional Production Onshore EOR Hughes GSR Inc, 214 (data from EIA Annual Energy Outlook 214) 4% of projected U.S. demand 22

23 Bakken Play Well Quality by Initial Oil Production 23 Hughes GSR Inc, 214 (map by John Van Hoesen based on data from Drillinginfo, August, 214)

24 Oil Production (Thousand Barrels per day) Bakken Oil Production Risked Forecast in various Drilling Rate Scenarios through 24 assuming 3 wells/section Peak 216 with 5% Drilling rate Increase Peak 215 With gradual Drilling Decline Most likely Production 2/yr declining to 1/yr Production 25/yr declining to 15/yr Production - constant 3/yr Most likely Wells 2/yr declining to 1/yr Wells 25/yr declining to 15/yr Wells - constant 3/yr Recovery to date 1.16 Bbbl Ultimate Recovery Bbbl by Number of Producing Wells Year Hughes GSR Inc, 214 (data from Drillinginfo, October, 214, 24

25 Oil Production (Thousand Barrels per day) Bakken Oil Production Risked Forecast for Most Likely Drilling Rate through 24 assuming 3 wells/section Peak 215 With gradual Drilling Decline Recovery to date 1.16 Bbbl Ultimate Recovery 6.8 Bbbl by 24 Most likely Production 2/yr declining to 1/yr EIA AEO 214 Most likely Wells 2/yr declining to 1/yr EIA Recovery by 24 = 8.8 Bbbl Number of Producing Wells Year Hughes GSR Inc, 214 (data from Drillinginfo, October, 214, 25

26 Thousand Barrels Comparison of Average Estimated Ultimate Recovery of Oil per Well by Play Horizontal Wells Only Next 22 Years First Three Years Top Two Plays Nearly Double to Triple Other Five Plays % recovered in first three years Hughes GSR Inc, 214 Bakken Eagle Ford Spraberry Wolfcamp Avalon/Bone Spring County Austin Chalk Niobrara 26 (data from Drillinginfo, May-July, 214)

27 Implications: - Shale has undoubtedly been a game-changer in the shortterm, but EIA projections of long term sustainability are highly questionable - High rates of drilling, with associated environmental impacts, are required to maintain production, with diminishing returns as sweet spots are drilled off and lower quality rock accessed - Current investments in infrastructure, power generation, and export facilities are based on flawed EIA forecasts of cheap and abundant oil and gas for the foreseeable future - A sustainable energy future requires a vision beyond the next couple of quarters or the next election - in the absence of a coherent plan, investments are being made on an ad hoc basis which are very likely to end badly 27