Challenges of Fracking for the MENA Region Martin Bachmann, Member of the Board

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1 Challenges of Fracking for the MENA Region Martin Bachmann, Member of the Board NUMOV German MENA Conference Berlin, 26 January 2017

2 Simplified Model of Hydrocarbon Deposits Conventional versus Unconventional Production BhTight Gas or Oil Sands Gas- and/or Oil-rich Shales Source: EIA

3 What made the Shale Revolution possible? Combining Horizontal Drilling with Multi-Fracs Vertical Drilling Horizontal Tight Gas Drilling Modern Shale Gas Drilling Source: EMPG Source: PackersPlus 1-10 Fracs 5-15 Fracs Fracs 3

4 Unconventional Resources Long-term Shale Gas Production Worldwide Source: Wood Mackenzie 4

5 Unconventional Oil and Gas Production Starting in the USA So far, unconventionals are mainly produced in USA Supportive legal system Favorable geological conditions Intense competition between contractors and producers results in low drilling costs Since 2014, falling hydrocarbon prices made upstream companies significantly reduce costs Lower break-even-prices: Efficiently managed US unconventional production may be cheaper than inefficiently managed conventional production from other countries Strong decline rates, especially in first year after drilling: Further drilling required to keep production levels

6 US Unconventional Oil and Gas Production Strong Increase in Production MMboe/d e Strong increase in production until 2015 Slight production decline in 2016 due to lower prices Unconventional production more resilient to price decline in 2016 than expected Tight oil Shale gas Source: EIA (2016: esteem)

7 Oil Supply Supply Increase especially in USA Change in Oil Production and Consumption (MMbbl/d) Production Consumption Strongest oil production increase in USA (tight oil), followed by Iraq, Saudi Arabia Global production increased more than consumption: 2015 oversupply USA other North America Europe Asia Pacific Latin America CIS Africa Middle East Source: BP Statistical Review of World Energy

Oil and Gas Prices Dear $100 Barrel 140 130 120 110 100 90 80 70 60 50 40 30 20 10 2012

8 Oil and Gas Prices Dear $100 Barrel Brent (USD/bbl) Gas (HH, USD/MMBtu) 8

9 Impact of Oil Price Decline on Public Budget Saudi Arabia: Lower Oil Price = Deficit Spending Fiscal break-even prices (US$/bbl) Government budget surplus / deficit (% of GDP) 8,2 5, ,4-9,5-13,0 Oil Price Forecast * * 15, * 2017* Fiscal Breakeven Price * IMF Forecast Source: IMF 9

10 Break-Even Prices for MENA Countries Current Oil Prices too Low for Fiscal Budget Balance Fiscal Break-Even Prices (US$/bbl) Libya Iraq Saudi Arabia Iran UAE Kuwait * 2017* * Forecast Source: IMF

11 Worldwide Primary Energy Mix Rising Demand for Oil and Gas Expected 20 Global primary energy consumption (Gtoe) Coal Oil Natural Gas Nuclear Renewables Source: IEA, World Energy Outlook

12 Liquids production (mmb/d) Supply from Largest Oil Field of the World Production Decline of Ghawar Wood Mackenzie estimate Historic peak (2004) Rystad estimate Source: Lambert Energy, Wood Mackenzie, Rystad

13 Oil volumes (mmbbls) Global Supply from Existing Fields Investments Required to Avoid Supply Gap Challenge for industry to avoid supply gap Supply gap to arise unless sufficient investments are made: Natural production decline Rising global oil demand US tight oil contribution to global demand Global oil demand Projected demand growth Supply decline curve (7% pa decline) Supply decline curve (5% pa decline) Adequate incentives for investments required to close supply gap US tight oil accounts for only 4% of global demand Source: Lambert Energy

14 Breakeven oil price (US$/bbl) Cost of Oil Break-Even Price for new Oil Projects Breakeven price range (high-low) Weighted average breakeven Oil sands US South tight East Deepwater oil Asia (BE<80) US US tight tight oil oil (BE<60) (BE>90) Other onshore US US tight tight oil oil (BE<90) (BE<50) North Sea Non-US tight Deepwater oil US tight Brazil oil (BE>50) (BE<70) Cheapest reserves in Middle East Costs of unconventional production declined strongly since 2014 Costs of unconventional production differ strongly by play Unconventional production from sweet spots cheaper than some conventional projects 20 Other shelf Deepwater Brazil (BE<50) Middle East shelf Russia / CIS onshore Heavy oil Africa onshore - Middle East onshore Global new crude and condensate volumes in 2021E (mmboe/d) Source: Lambert Energy, Wood Mackenzie, Rystad

15 Upstream Investment Strong Decline in Investment after 2014 Global upstream investments (bill. US$) 1,200 1,100 1, July 2014 forecast Nov 2016 forecast Decline in oil and gas prices since 2014 strongly affected upstream investment Investment budget decline due to lower prices for services as well as project postponements Cumulative cut of $ 2.4 trillion in planned expenditure between (= annual GDP of France) Low investment of today might result in price spikes in next decade Source: Lambert Energy, Wood Mackenzie, Rystad

16 Implications of US Fracking Lower Hydrocarbon Prices OIL Markets oversupplied at 100 US$/bbl Lower prices: Challenge for MENA governments Unconventional production reacts more quickly to price signals than conventional production Declining share of OPEC unless prices are very low: More challenging to regulate supply Lower US oil imports: Stabilizing MENA countries less necessary for USA GAS Regional markets linked by LNG If HH price is 4 US$/MMBtu, LNG full cycle costs below 11 US$/MMBtu everywhere: No need for higher prices anywhere, even in long run Most LNG supply from stable countries: geopolitical issues less important LNG markets oversupplied by mid-2020s LNG exports for MENA area less profitable, LNG imports an alternative for gas to remain fuel of choice

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