Marcellus Shale Coalition: 2011 Shale Gas Insight Conference Philadelphia, Pennsylvania September 8, 2011 speech by: Paul Smith, EVP, North American Operations, Talisman Energy Inc. Responsible Shale Gas Development Collectively unlocking the greatest energy resource in a generation Ladies and Gentlemen, It is an honor to be invited here today for the inaugural MSC Shale Gas Insight conference. If you haven t yet, you will soon realize that I ve got a bit of an accent. Thus, I must admit, it feels a bit odd - as a Brit - to be here in Philadelphia where America s founding fathers declared their independence from British rule. But that is history and we re here today to talk about a different kind of revolution that of shale gas. In only a few years, the application of technology to unlock vast gas deposits in tight shale reservoirs is changing the energy landscape in North America in a way that few of us could have imagined. While it s no exaggeration to state that shale gas represents one of the biggest opportunities in a generation, its development to date has not been without challenges. To collectively grasp this opportunity, the industry must listen and address the concerns being expressed by stakeholders, separate fact from fiction, and perhaps most importantly take an active lead in shaping the responsible development of this unique resource. Let me begin by setting some context. In the last decade, the application of technology to tight reservoirs has started to unlock one of the greatest remaining energy resources in the world. The recently updated EIA study of gas resources in North America estimated 1,250 TCF of technically recoverable unconventional gas; and 300 TCF of existing, proven conventional gas. Together, this massive gas resource base could supply existing North American gas demand for the next 60 years. And these are probably very conservative numbers because they are based only on what we know today. It is the sheer scale of this resource, combined with the industry s ability to rapidly bring resources on stream, that has resulted in a major paradigm shift in the North American energy landscape.
As recently as four years ago, it was widely thought that U.S. natural gas was in short supply, resulting in LNG import terminals being constructed up and down the East coast of the United States. The United States now finds itself as the world s largest gas producer, and has shifted from a deficit to a surplus gas position. In just four years, North American shale gas production has nearly doubled from 11 bcf/d to more than 20 bcf/d with its economically advantaged cost of supply displacing conventional gas production. Shale gas is expected to double again to ~40 bcf/d by 2020. If demand were greater, there s no doubt the industry could supply far more without prices having to rise much. However, further inroads for natural gas into North American power and transportation are largely policy-dependent. Energy policy in the U.S. and Canada remains disjointed. So what is the case for gas to become an increasingly viable component in the U.S. energy mix going forward? First, I have mentioned the sheer scale of the resource base and its ability to provide a sustainable and secure source of supply in North America for multiple generations. For example, in the period of just two years the Marcellus in Pennsylvania has gone from producing 300 mmcf/d back in 2009, to what is expected to be more than 3.5 bcf/d by the end of this year. Second, gas provides a unique opportunity for a fundamental shift in U.S. energy policy, as well as increased energy security against the back drop of a complex and volatile global geopolitical environment. Of course the biggest opportunity is for gas to displace coal-fired power generation. Today, close to 50% of U.S. power generation is from coal, and displacing 20% of this coal-fired power with gas would create an additional 10 bcf/d of gas demand. Today, the U.S. imports over 11 million barrels of oil per day, or ~22% of the total energy consumption mix. A modest 10% increase in gas penetration in the transportation market, with a particular focus on long haul trucking fleets, would result in a reduction of approximately 1.5 million barrels a day of oil imports. But creating new markets for gas does not stop here there are several LNG export projects now on the drawing board in both Canada and the U.S. A bit closer to home for me, there are several Gas-to-Liquids projects being considered in North America, looking to take advantage of the long-term decoupling of gas and oil prices. For example, Talisman, in conjunction with its partner Sasol, is currently conducting a feasibility study for a large scale Gas-to-Liquids facility in Western Canada. Third, gas has a much lower carbon footprint than coal. High efficiency natural gas fired power can produce up to 70% lower greenhouse gas emissions than existing brown coal fired generators, and less than half the greenhouse gas emissions of the latest technology clean coal power stations. According to a recent MIT study, a major switch to gas-fired
power in existing power facilities, through policy and incentives, could cut the nation s contribution to global carbon dioxide by 8%, which is almost half the U.S. unofficial 2020 emissions reduction goal. What about renewables I hear the skeptics say? Whilst all of us should aspire to an ever increasing component of renewables within the energy mix, renewables simply cannot compete today, with natural gas, in terms of cost of supply and scale. As such, gas has the potential to be an economic transition fuel to the low carbon economy, whilst allowing innovation within the renewables space to make it a realistic and long-term viable alternative to fossil fuels. However, more joined up actions are required from policy makers to realize this fundamental shift in the energy mix in North America. And last, but by no means least, the shale industry is providing a rare, new, and sustainable growth engine for the American economy. There has been very little recognition of the potential for shale to generate employment and fuel economic growth. For 2011, development activity in the Marcellus alone is projected to contribute almost $13 billion to the economy and lead to almost $1.2 billion in state and local taxes. In addition, shale gas operations have supported the creation of thousands of direct and indirect jobs in Pennsylvania over the last three years. So having looked at the positive side of the ledger, it is important to recognize some of the challenges that the industry is facing in its pursuit of the development of this great resource base. Quite frankly, the gas industry has been caught napping somewhat in the last few years, allowing opponents to attack the shale industry, shape public perception, and seize the initiative with the public who harbor genuine concerns around shale gas development. It is critical to the future success of this industry that we listen; we begin to address some of the challenges we face; and we communicate more openly with stakeholders to ensure economic benefits and environmental stewardship go hand-inhand. We must start with recognition that there is a large stakeholder base that has genuine concerns around shale gas development. Everywhere we operate, we hear that the public wants the facts they want strong regulation and safe, responsible, operatorship by the industry. It is clear that the industry has not made the case to its stakeholders, including governments, utilities, and the public, that shale gas represents a long-term, low-cost, safe, and clean source of energy for North America. This is not a short-term phenomenon. Whilst it is hard not to sometimes get disheartened when reading misleading external press and commentary on our industry, I believe the core of the concerns being expressed by our external stakeholders include the following:
First, the industry s reluctance, up until fairly recently, to be more transparent regarding small doses of various chemicals routinely used during fracturing operations. The initial reluctance to disclose facts allowed opponents to shape public perception by accusing the industry of hiding the volumes and chemical make-up of fracture additives. The fact is, these chemicals are highly diluted in a mixture of 99% water and sand and then injected into formations several thousand feet below the ground. Second, the sourcing, use, and ultimate disposal of the large volumes of water used in slick water fracturing operations. For example, an average well in the Marcellus will use approximately 4 million gallons of water, with an average of 10% returned when the well comes online. Water is a highly emotive issue, particularly in rural areas of Pennsylvania where many residents continue to rely on water wells for their day-to-day needs. Third, potential gas migration into shallow potable groundwater aquifers. Many studies, including the recently completed New York Department of Environmental Conservation s SGEIS report, have concluded that gas migration cannot be the direct result of the hydraulic fracturing operations that occur 8-10,000 feet below shallow water aquifers. However, industry must recognize that reported cases of gas migration into water tables can occur as the result of ineffective well design and cementing practices. Finally, whilst shale gas development activity is brief an average well in the Marcellus takes approximately 40 days to drill and complete it is important to recognize that the associated large-scale, heavy-duty vehicle activity can be disruptive to local communities and cause damage to existing road infrastructure. In the eyes of our stakeholders, I am a firm believer that all of us in this industry are only as good as the operator with the lowest standards and this poses a major challenge in a fragmented industry with hundreds of shale gas operators. I believe further industry consolidation is inevitable as industry and regulators come together to raise the bar on what is required to responsibly develop this unique resource for generations to come. Industry cannot, and should not, wait for regulation to raise the bar we must begin to lead and not follow. The recently published interim DOE report, commissioned by Energy Secretary Chu, makes a number of recommendations as to how standards could be improved in shale gas development. While I do not agree with the details of every recommendation (some of which would be very difficult to implement in a practical way), I do support the overall thrust of this report. And in particular, I strongly support the recommendation that leading companies in the industry should work together to develop industry best practices. I m not going to profess that we have all the answers, but let me try and outline for you the way that Talisman, and hopefully the industry as a whole, will come together to address the challenges we face. I am proud to say that Talisman has been one of a handful of large shale operators at the forefront of addressing the issues. We are developing a suite of Operating Principles intended to govern our shale operations globally. Many of these principles we already adhere to others are work in progress.
At the core of what I believe we need to do as an industry lies the need for regulators, policy makers, and the public to have access to objective information. On the issue of frac fluid disclosure, many in the industry have already moved to full, voluntary disclosure using the external FracFocus platform. Indeed, Talisman has been transparently reporting frac fluid chemical composition on a well-by-well basis on its public website since 2010. However, not all industry participants, and this includes the service companies, have accepted the principle of full and open disclosure, and hence it is my belief that local regulators will need to enforce disclosure in order to force reluctant players to join the rest of the industry. In addition, operators will increasingly need to employ eco-friendly chemical formulations that assure stakeholders of the environmental robustness of operations. Best-in-class operators will find the right balance between economics and sustainability. On the emotive issue of managing water, the development of a comprehensive water management framework addressing the sourcing, use, and recycling, and ultimately disposal of water will be a strategic imperative for all operators. The goal for all of us should be 100% recycling of water through closed systems an aspiration Talisman has almost met in our large scale shale factory in the Marcellus, where a complex water network allows us to efficiently re-use nearly 100% of our flowback water. In one of our other plays, The Montney in British Colombia, we are in the process of building a large water pipeline that will directly connect our development area with one of the largest Hydro lakes in North America, eliminating the need for any trucking of water. Industry, in conjunction with EPA recommendations and restrictions, should be striving to effectively manage the eventual disposal of water. One of the safest ways to do so, and a method widely used around the world, is through the use of injection wells that are located thousands of feet below the ground in depleted reservoirs. The wide spread use of water disposal wells will eliminate the need for operators to use municipal water disposal facilities. On the issue of potential aquifer contamination, through gas making its way to surface through inappropriate well design and cementing practices, the industry has a unique opportunity to collaborate on the research and implementation of best practices. It is important to note that there is not a one size fits all to well integrity best practices geological differences between basins, and even within a basin, means that best practices will need to be tailored to specific conditions. The good news is that ensuring well integrity and eliminating the possibility of gas migration is not a new issue for our industry, and we have demonstrated our ability to do so in far more complex operating environments than the relatively benign onshore environment in the U.S. Finally, on the issue of community, disruption and infrastructure damage caused by shale development activity our industry needs to do a better job in engaging at the local level with impacted communities. Our obligations are not completed by simply sharing
information on planned shale gas activity we must work with communities to allow some of the economic benefits to flow directly to impacted communities and ensure that damaged infrastructure, like roads, are repaired or replaced so they are in better condition than before we arrived. In Pennsylvania alone, Talisman will have spent $60 million in the last 2 years on the repair of roads to ensure we leave a positive footprint following our activity in an area. Collectively, our industry has spent over $500 million on repairing and upgrading roads in Pennsylvania. Talisman has implemented a Local Economic Engagement Strategy to help build our stakeholder communities into sustainable, competent business partners. We firmly believe that healthy dialogues among stakeholders regarding how our industry can support local communities are imperative to continuous, successful shale development. In conclusion, unconventional gas is a striking example of innovation turning assumptions on their head and opening up new possibilities. As such, it should serve to inspire, as well as facilitate, further breakthroughs in order for this unique resource to be a long-term, secure, low-cost and low-emissions fuel for generations to come. In order to grasp this opportunity, we need to address the public s concerns and hold ourselves accountable to the very highest standards, otherwise we threaten the success we have had to date, and the future of one of the country s most valuable natural resources. Ladies and Gentlemen I thank you for listening and will be more than happy to take any questions during the next break.