Unconventional Oil & Gas: Reshaping Energy Markets

Guy CarusoSenior Advisor

Presented at Journees Annuelles des Hydrocarbures23 October 2013

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US Perspective: from Resource Scarcity to….

- US is heading towards 90% Energy Self-Sufficiency But Still Part of a Global Market

- Changing Demand Growth Centers- New Emerging Players but Old Institutions- Policies Based on Resource Scarcity and

Rising US Demand Need to Be Revisited- Environmental Issues Still Loom Large- The “Great Dilemma” of How We Go Forward

Petroleum System Process

324803

120° F120° F

350° F350° FGenerationGeneration

MigrationMigration

Seal RockSeal Rock

ReservoirRockReservoirRock

OilOil

WaterWater

Gas CapGas Cap

EntrapmentEntrapment

Source: USGS, April 3, 2012

Conventional vs. Continuous (Source Rock) Resources

Source: USGS

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Hydraulic Fracturing

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Unconventional Natural GasResources

U.S. shale gas production from the major plays has increased dramatically

US Natural Gas Production

Source: U.S. Energy Information Administration, Annual Energy Outlook 2013, June 25, 2013

50%

34%

Diapositive 9

CSIS2 New SlideCSIS User; 30/08/2013

High demand, advanced technology, moderate development cost

Natural Gas Resources Have Potential to Supply the Market for Decades

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Natural gas price projections significantly lower due to an expanded shale gas resource base

natural gas spot price (Henry Hub) per million BTU

Sources: EIA, Annual Energy Outlook 2011; EIA, Annual Energy Outlook 2010; and EIA, An Updated Annual Energy Outlook 2009 Reference Case

ProjectionsHistory

Updated AEO2009

AEO2011

AEO2010

AEO2013(201

1$)

Increased Production Allows U.S. to Transition from Net Importer to Net Exporter of Natural Gas

Source: U.S. Energy Information Administration, Annual Energy Outlook 2013, June 25, 2013

Henry Hub spot market natural gas Prices

(2011 dollars per million Btu)History Projections2011

Diapositive 12

CSIS3 Updated SlideCSIS User; 30/08/2013

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But…Major Policy Questions Remain

• Industry desire for “demand pull” to increase prices vs. gov’t need to ensure development is done right

• Gas Utilization Options (power generation, transport, petrochem or refinery feedstocks, industrial use?)

• Export Policy and Volumes• Compatibility with Industrial Policy, Energy Security and

Environmental Goals• Regulation at Federal or State/Local levels • Funding for/Pace of Infrastructure buildout

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Tight/Unconventional OilResources

NPC Study Identifies Large Oil Potential as Well

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01 0002 0003 0004 0005 0006 0007 0008 0009 000

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0019

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s b/

d

1900-2007 2008-2010 2011-2016

Forecast through 2016 shows continued growth

Source: EIA, Excludes NGLs and Other Liquids

1988

Tight oil production for selected plays through August 2012 exceeds 1.8 million b/d

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Can the Bakken Story be Replicated (Again and Again)?

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2005 2010 2015 2020

000 b/d Surging U.S. Shale Liquid Production (oil and NGL)

Woodford

Niobrara

Marcellus

Lower Monterey

Granite Wash

Eagle Ford

Barnett

Bakken

Avalon/ Leonard

Source: Energy Security Analysis, Inc. (ESAI) April 3, 2012

Source: EIA, Texas RRC, North Dakota DMR

US Production Backing Out Imports

Thou

sand

Bar

rels

*Avg monthly production based on annual figures

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10 000

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r.-20

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-201

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Bakken production

Eagle Ford Production

Angola Crude and Products

Nigeria Crude and Products

Algeria Crude and Products

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Source, EIA AEO 2013, STEO (April 2013)

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Source: EIA Annual Energy Outlook 2013 Early Release

Continued liquids growth and reduced demand means lower imports

US Liquid fuels supply, 1970-2040M

illio

n b/

d

Environmental/Regulatory/Societal Challenges

Realizing the full promise of shale resources is not a certainty and US domestic policy is important

• All shales are not alike; application of drilling/reservoir fracturing technology & operational experience matters

• Steep decline rates require ongoing investment and drilling; and repeated fracturing

• Cost escalation and low commodity prices limit prospects

• Infrastructure build-out and refinery rationalization

•Well design and management of surface chemicals/materials are the best barriers to protecting water aquifers•Disclosure of components of fracking• Scale of water use, treatment & disposal are challenging •Community Issues – infrastructure, land use, population density, noise, haze, health issues, road congestion and repair need to be addressed•Seismicity – associated with wastewater injection•Regulation and enforcement are essential

Technical/Economic ChallengesTechnical/Economic Challenges

Potential Implications for U.S. Market

• With a leveling or decline in demand, new supply growth will shape the market

• Spare refining capacity (as currently configured) in US Gulf Coast will encourage export of petroleum products

• New infrastructure could distribute domestic crudes east and west as well as south

• US Policy objectives need to be understood– Industrial policy to make jobs and comparatively low-priced energy– Environmental policy to protect water and air resources– Climate policy to reduce carbon emissions– Energy Security and BOP Policy to reduce oil imports

Implications for Europe

• Higher energy costs could hinder European competitiveness, especially in highly industrial and export oriented countries

• Competitive pressure from US refineries exacerbate troubled European refineries

• Increased used of coal due to cheaper prices and nuclear shutdowns pose an obstacle to climate change goals

• Energy costs likely to remain higher in Europe, even with export of US LNG or development of unconventional resources

• Flat European demand forces Russia to look for new consumers– LNG exports to Asian consumers– Pipeline to China

So What Could Alter the Forecasts?

• Resource Over/Under Performance or Steep decline rates• Technology Advancements, including Disruptive Technologies

in Competing Areas• Commerciality/Economics/Energy Prices & Costs• Investment Climate for Participants• Timing/Expense of Infrastructure Build-out• Public Sentiment – License to Operate (upstream &

downstream)• Geopolitical and/or Catastrophic Events/Accidents• Policy & Regulations• Saudi/OPEC response• Climate Change & the Transformation to Low Carbon Energy

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Thank youMerci beaucoup

• Questions?