Pine Brook Annual Meeting, October 22, 2013 Unconventional Resources: The First Revolution of the 21 st Century Presentation by Howard Newman
Today s Topics Setting the Stage The Return of Petro America: Oil The Changing Landscape for Gas Geopolitics 2
Setting the Stage
Setting the Stage The explosion in unconventional oil and gas production is continuing and showing no signs of slowing down in the foreseeable future The size of the resource base is enormous and will grow with new plays, new learning and new technologies Macroeconomic implications for the U.S. are very positive An investment opportunity that is long-lasting and will create long-term employment opportunities in the U.S. The new paradigm: from where to find it to where to sell it Global implications of the unconventional revolution are evolving 4
The Return of Petro America: Oil
Million Barrels Per Day U.S. Crude Oil Production 12.0 U.S. Crude Oil Production 10.0 10.0 8.0 +48% 7.3 6.0 4.0 5.0 2.0-1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: EIA and BP Statistical Review of World Energy. 6
Investment Implications For the first time in 50 years, the U.S. oil industry is growing Instead of releasing capital as production declines, the industry will have a continuing need for new capital to support increasing production 5 million B/D increase in production will require about $500 billion of investment 7
But Wait: There s More! New Production Capital Needed = $500 billion Oil Field Service Capital Needed = $125 billion Infrastructure Capital Needed = $100 billion Capital to Maintain Production = $100 billion Total Capital Needed = $825 billion 8
Simple Model for Development: Increase Wells Drilled By 10% Per Year Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Net Prod'n 1,726 2,576 3,320 4,044 4,784 5,557 6,379 7,260 8,210 9,237 (MMboe) CapEx $131 $145 $159 $175 $192 $212 $233 $256 $282 $310 ($Bn) Financing Need ($67) ($50) ($39) ($30) ($22) ($15) ($9) ($2) $4 $10 ($Bn) 9
Financing Investments Is Different than Financing Housing Net Imports vs. Residential Investment 1 ($bn) 1,000.0 Net Imports of Goods and Services Residential Investment 800.0 600.0 400.0 200.0 0.0 (200.0) (400.0) (600.0) (800.0) (1,000.0) 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 1) Source: Bureau of Economic Analysis. 10
5 Million Barrels a Day Means Direct boost to GDP of $200 billion import substitution that works! 2 million jobs and maybe more than 3 million Very few direct jobs Indirect jobs everywhere 11
Oil: Why So Many Indirect Jobs? Price per barrel of oil: $100 Royalties: $15 Wages: $10 Intermediate goods: $35 Production taxes: $10 Income taxes: $10 Profit: $20 12
What Kind of Indirect Jobs? Oilfield service jobs Infrastructure and other civil construction jobs Pipelines and railroads Highways - new and repairs! Regulatory and other government jobs (maybe too many of these) Service and consumer product jobs 13
Million Barrels Per Day Unconventional Oil Displaces Imports Imports at a 20 year low And represent the lowest percentage of supply in nearly 22 years 16.0 40.0% 12.0 30.0% 8.0 20.0% % of Supply Net Imports 4.0 10.0% Net Imports as % of Supply - 1972 1977 1982 1987 1992 1997 2002 2007 2012 0.0% 14
Another Path to Energy Independence (Million barrels per day) Sources of Oil 2012 Potential Sources of Oil 2020 Non-Canadian Imports 6.1 Non-Canadian Imports 2.0 Saudi Arabia 1.4 Mexico 1.0 Venezuela 0.9 Others 2.8 Canada 2.4 Canada 2.0 U.S. Production 6.5 U.S. Production 11.0 Total 15.0 Total 15.0 Source: EIA. Note: Excludes products and natural gas liquids. 15
Unconventional Resources Work at $60-80/Barrel Oil Basin Economics Price Required for 10% After-Tax Rate of Return 1 Source: TPH Energy Research as of January 2013. 1) Does not include costs such as land acquisition and exploration that are considered sunk costs. 16
KBD Contribution to Global Productive Capacity (2012 2019) 5000 4000 3000 2000 1000 0-1000 -2000 Mexico China Algeria Colombia Qatar Indonesia Egypt Ecuador India Oman Thailand Yemen Malaysia Equitorial Guinea Vietnam United Kingdom Gabon Denmark Azerbaijan Australia Brunei Congo Syria Norway Kuwait Ghana Sudan Nigeria Libya Saudi Arabia Iran Argentina Kazakhstan Venezuela US GoM Angola Russia UAE Iraq Brazil Canada US Onshore Source: Woodmac, Credit Suisse estimates 17
Unconventional Oil Balances the World Market Reinvestment Cost Curve UNCONVENTIONAL Source: Credit Suisse Research as of September 2011. 18
The Changing Landscape for Gas
Gas Consumption (Tcf) Shale Gas and the U.S. Economy 20.0 $8.00 16.0 12.0 8.0 $6.00 $4.00 Gas Price ($ / Mcf) Electric Power Non-Electric Power Wellhead Price 4.0 $2.00 0.0 2007 2008 2009 2010 2011 2012 $0.00 20
The Changing Landscape for Gas Reduced U.S. carbon footprint to lowest level in 20 years Substitution of natural gas for coal in power generation reduces per kilowatt emissions by approximately 50% North American gas priced at short term marginal cost $3.50 - $4.00 commodity before cost improvements Re-establishes the U.S. as the low cost producer of thermally intensive products Great for the chemical industry and other manufacturing 21
Creative Destruction and Job Creation First impact from the Shale Revolution was a $100 billion reduction in the cost of energy How would the price reduction result in increased GDP? Displaced coal workers Reduced government revenues Reduced corporate savings Increased imports Development of natural gas from shale shows the importance of creative destruction in economic growth 22
Potential for LNG Low prices domestically vs. reduced emissions globally Competing against an increasing global supply World price moving to reflect gas on gas competition 23
Relative LNG Prices 24
Natural Gas: Moving to Excess Supply Globally The EIA estimates that there are 35,782 Tcf of assessed shale gas in-place and 7,795 Tcf of technically recoverable resources globally Assessed World Shale Gas and Shale Oil Resources 1) Source: EIA Technically Recoverable Shale Oil and Gas Resources Reports for the years 2011 and 2013 2) Note: Technically recoverable resource data for Russia not included in 2009 report due to significant quantities of conventional reserves noted to be in place. 25
Moving to Excess Supply # Field (Discovery) Country Recoverable Resource Rank Name of Discovery (Tcf) 1 Bowland Shale (1) Britain 1,329 2 South Pars/North Dome Iran and Qatar 1,235 3 Marcellus (Northeast & Southwest) Appalachia, US 231 4 Urengoy Russia 222 5 Yamburg Russia 138 6 Hassi R Mel Algeria 123 7 Montney Alberta / British Columbia, Canada 113 8 Shtokman Russia 110 9 Australia Australia 105 10 Rovuma Basin Mozambique 100 11 Dauletabad-Donmez Turkmenistan 99 12 South Iolotan Osman Turkmenistan 98 13 Zapolyarnoye Russia 95 14 Haynesville Shale ArkLaTex, US 92 15 Hugoton USA (TX-OK-KS) 81 16 Malay Penninsula(2) Malaysia 77 17 Groningen Netherlands 73 18 Bovanenko Russia 70 19 Medvezhye Russia 68 20 Horn River Shale British Columbia, Canada 64 21 North Pars Iran 48 22 Karachaganak Kazakhstan 46 23 Kish Iran 45 24 Orenburg Russia 45 25 Duvernay Alberta, Canada 45 26 Kharsavey Russia 42 27 Shah Deniz Azerbaijan 42 28 Bossier (Includes Deep Bossier) ArkLaTex, US 35 29 Golshan Iran 30 30 Fayetteville Shale Arkansas, US 27 31 Green River Basin (Pinedale, Jonah, Mesaverde CBM) Wyoming, US 27 32 Mannville CBM Alberta, Canada 23 33 Barnett (Core & Southwest) Texas, US 23 34 Tabnak Iran 22 35 Kangan Iran 20 36 West Texas Barnett / Woodford Shale Texas, US 19 37 Leviathan Field Israel 18 38 Woodford Shale Oklahoma, US 16 39 New Albany Shale Illinois/Indiana, US 11 40 Tamar Field Israel 10 41 Eagle Ford Shale (Gas & Condensate) Texas, US 9 42 Horseshoe Canyon CBM Alberta, Canada 8 43 Uinta & Piceance Basin (Mesaverde Tight Gas, Niobrara Shale) Utah / Colorado, US 7 44 Granite Wash Texas / Oklahoma, US 5 45 Antrim Michigan, US 4 46 Utica Shale Ohio, US 4 47 Powder River Basin (Big George) Wyoming / Montana, US 3 48 Pearsall Shale Texas, US 3 49 Black Warrior Basin CBM Alabama, US 1 Indicates North American Discovery Nearly half of the largest gas field discoveries are a result of the North American Unconventional Revolution Source: Wood Mackenzie, IPC Petroleum Consultants: Global Natural Gas Reserves A Heuristic Viewpoint, USGS Report: Role of Stranded Gas in Increasing Global Gas Supplies (1) Midpoint estimate of potential resource as outlined in the British Geological Survey. (2) Includes two offshore clusters adjacent to the Malay Peninsula, which together account for 29 TCF of gas. 26
Geopolitics
The (Old) New World of Energy A return to a world where the principal issue in the energy market is demand, not supply Access to markets will dominate the discussion as opposed to access to commodities The trade-offs between energy, the economy and the environment will change What is the role of the United States as "global policeman in a world when it is essentially energy self-sufficient? Gulf countries distancing themselves from the U.S. in Egypt Impact on the pivot to Asia 28
Changing Geopolitical Realities What does a lid on oil prices mean for stability in the MENA region? OPEC required oil price has been rising - and there is no end in sight OPEC as the new Texas Railroad Commission Strange bedfellows in favor of higher prices: OPEC and the Environmentalists Changing the conversation between countries and the oil industry Brazil s auction of its subsalt play Colombia s new terms for unconventional resources Russia, LNG or British Shale Gas to fuel the growth of Europe Natural gas in Iran: a way out of the nuclear stand-off? 29
Summary The U.S. is resource rich and production is growing for the first time in 50 years Developing these resources is a game changer in every imaginable way for the U.S. This is a long term opportunity Capital to execute development is substantial but available Interesting geopolitical implications 30