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Presentation at:Annual Meeting of the Brennstoff und Wasser Ausschuss

of the Verband der Industriellen Energie-und Kraftwirtschaft e.V. (VIK)Berlin, Germany,February 27, 2013

207 High StreetNewburyport MA 01950 USA

[email protected]

THE GERMAN COAL INDUSTRY: BETWEENECONOMIC NECESSITY AND POLITICS

By: Dr. Manfred Raschke

McCloskey’s European Coal ConferenceNice, May 21-23, 2006

International Strategic Information Services

U.S. SHALE OIL AND SHALE GAS:ENERGY SECURITY AND MARKET IMPLICATIONS

Presentation at:Annual Meeting of the Brennstoff und Wasser Ausschuss

of the Verband der Industriellen Energie-und Kraftwirtschaft e.V. (VIK)Berlin, Germany,February 27, 2013

By: Dr. Manfred G. RaschkePresident, ISIS

STRATEGIC IMPLICATIONS OF GREATER U.S. OIL ANDGAS PRODUCTION - 1

• The advent of shale gas and tight oil production in North America and therecognition of this resource’s widespread prevalence throughout the worldhas changed the entire fossil fuel narrative from one of shortage andimminent scarcity to one of comparative abundance. This will reduceinterest in renewable alternatives as well as nuclear power and inalternative technologies such as the electric car.

• Gas has displaced over 100 million tonnes of coal in the electric generatingsector. Between 2008 and end 2012 coal consumption in the sector hasdeclined 21% and gas has increased 42%.– Substantial volumes of this coal have gone into the export market as

producers market aggressively and railroads reduce their rates

• There are obvious environmental benefits as CO2 emissions in the U.S.have fallen faster than in any other industrial country. But cheap gas hasreduced power prices to such a degree that renewables such as wind andsolar, even with subsidies, are economically unattractive.

• The advent of shale gas and tight oil production in North America and therecognition of this resource’s widespread prevalence throughout the worldhas changed the entire fossil fuel narrative from one of shortage andimminent scarcity to one of comparative abundance. This will reduceinterest in renewable alternatives as well as nuclear power and inalternative technologies such as the electric car.

• Gas has displaced over 100 million tonnes of coal in the electric generatingsector. Between 2008 and end 2012 coal consumption in the sector hasdeclined 21% and gas has increased 42%.– Substantial volumes of this coal have gone into the export market as

producers market aggressively and railroads reduce their rates

• There are obvious environmental benefits as CO2 emissions in the U.S.have fallen faster than in any other industrial country. But cheap gas hasreduced power prices to such a degree that renewables such as wind andsolar, even with subsidies, are economically unattractive.


• Lower cost natural gas and petrochemical feedstocks are sparking a majorrevival in the chemical and petrochemical industry and contributing to thehealth of the steel, non-ferrous metals, glass, and pulp and paper industries.

• Shale gas (from the U.S. and elsewhere) will weaken the links between oiland natural gas prices.

• The expected continuation in the rise of oil production in North America inthe next two decades has already reduced crude oil prices in the middle ofthe continent to the lowest in the world (this is due to a lack of pipelinecapacity). Middle East political tensions and dysfunctional producergovernments such as in Venezuela are likely to keep oil prices high. In fact,without high oil prices much of shale oil (in U.S.) and oil sand (in Alberta)production would be economically unattractive.

• Lower cost natural gas and petrochemical feedstocks are sparking a majorrevival in the chemical and petrochemical industry and contributing to thehealth of the steel, non-ferrous metals, glass, and pulp and paper industries.

• Shale gas (from the U.S. and elsewhere) will weaken the links between oiland natural gas prices.

• The expected continuation in the rise of oil production in North America inthe next two decades has already reduced crude oil prices in the middle ofthe continent to the lowest in the world (this is due to a lack of pipelinecapacity). Middle East political tensions and dysfunctional producergovernments such as in Venezuela are likely to keep oil prices high. In fact,without high oil prices much of shale oil (in U.S.) and oil sand (in Alberta)production would be economically unattractive.


• The Canadian dollar has already become a petrocurrency and increasedU.S. oil production may strengthen the dollar even as the U.S. runs hugebudget deficits

• Military and diplomatically greater U.S. energy self-sufficiency (but not“energy independence”) will accelerate the strategic focus on Asia and willreduce the commitment to Middle East involvement. This may also result ina much lighter U.S. military footprint in Western Europe.

• The Canadian dollar has already become a petrocurrency and increasedU.S. oil production may strengthen the dollar even as the U.S. runs hugebudget deficits

• Military and diplomatically greater U.S. energy self-sufficiency (but not“energy independence”) will accelerate the strategic focus on Asia and willreduce the commitment to Middle East involvement. This may also result ina much lighter U.S. military footprint in Western Europe.

NET OIL AND GAS IMPORT DEPENDENCY IN SELECTEDCOUNTRIES IN THE IEA’S NEW POLICES SCENARIO,

2010 AND 2035

Source: International Energy Agency, World Energy Outlook 2012

SAMPLE CONVENTIONAL/UNCONVENTIONAL OIL ANDGAS GEOLOGIC SCHEMATIC

Source: Parks Paton Hoepfl & Brown

Source: EIA

ILLUSTRATIVE SCHEMATIC OF HORIZONTAL DRILLINGAND HYDRAULIC FRACTURING

Source: ProPublica

NORTH AMERICAN TIGHT OIL PLAYS

Source: IHS

SHALE GAS UNEXPECTEDLY QUICKLY CHANGEDTHE LONG-TERM ENERGY PICTURE

• In 2003, Alan Greenspan, then chairman of the Federal Reserve, testifiedto Congress that North America was facing a potential shortage ofNatural Gas. (June 10, 2003)

• Over 40 New LNG import terminals were announced for the U.S. andborder locations in Canada and Mexico.

− Nine new terminals were built bringing the current total to 13(plus one more each in Canada and Mexico).

• Even as Greenspan spoke, the gas production industry (almost allmid-size to small companies) was making the breakthroughs incombining directional drilling with hydraulic fracturing.

• In 2003, Alan Greenspan, then chairman of the Federal Reserve, testifiedto Congress that North America was facing a potential shortage ofNatural Gas. (June 10, 2003)

• Over 40 New LNG import terminals were announced for the U.S. andborder locations in Canada and Mexico.

− Nine new terminals were built bringing the current total to 13(plus one more each in Canada and Mexico).

• Even as Greenspan spoke, the gas production industry (almost allmid-size to small companies) was making the breakthroughs incombining directional drilling with hydraulic fracturing.

THE SHALE GAS HYPE IS EVERYWHERE

• At Davos in January 2010 Tony Hayward, then still CEO of BP,described the impact of shale gas: “Unconventional gas willtransform the entire energy production landscape in the United States…and alters the U.S. energy outlook for probably a hundred years.”

• Dan Yergin, IHS/CERA chairman, wrote in the Wall Street Journalthat “a shale gale” which only became evident in 2007 “is alreadychanging the national energy dialogue and overall energy outlookin the U.S. – and could change the global natural gas balance”(November 3, 2009).

• By 2012 the International Energy Agency hailed a “New Goldenage of Gas”.

• At Davos in January 2010 Tony Hayward, then still CEO of BP,described the impact of shale gas: “Unconventional gas willtransform the entire energy production landscape in the United States…and alters the U.S. energy outlook for probably a hundred years.”

• Dan Yergin, IHS/CERA chairman, wrote in the Wall Street Journalthat “a shale gale” which only became evident in 2007 “is alreadychanging the national energy dialogue and overall energy outlookin the U.S. – and could change the global natural gas balance”(November 3, 2009).

• By 2012 the International Energy Agency hailed a “New Goldenage of Gas”.

SHALE GAS RADICALLY ALTERED FORECASTSFOR U.S. LNG IMPORTS

Source: US Energy Information Administration, Annual Energy Outlook 2004 and 2012, reference cases.

SHALE OIL BOOM IN THE U.S. LEADS TO LARGE SCALENATURAL GAS FLARING

Source: NASA

TODAY ALMOST 50 PERCENT OF U.S. GAS IS PRODUCEDUSING FRACTURING; IN THE FUTURE ALL GAS WILL COME

FROM RESERVES REQUIRING FRACTURING

Source: EIA, Annual Energy Outlook 2011

ANNUAL U.S. SHALE GAS PRODUCTION BY PLAY2000-2010

Source: U.S. Energy Information Administration; Lippman Consulting

U.S. TIGHT OIL PRODUCTION FOR SELECTED PLAYS2000-2011

Source: U.S. Energy Information Administration

U.S. NATURAL GAS IMPORTS, 2002-2011

billion cubic feet

Source: US Department of Energy, Office of Fossil Energy

Source: Federal Energy Regulatory Office of Energy Projects

Note: Last updated January 15, 2013

Source: US Department of Energy, Office of Fossil Energy

Source: Federal Energy Regulatory Commission, Office of Energy Projects

ADVENT OF LARGE VOLUMES OF SHALE GAS HASLOWERED EIA FORECASTS OF FUTURE GAS PRICES

Source: EIA, Annual Energy Outlook 2011

HOW MUCH SUPPLY IS THERE? US crude production in 2012 was 6.3 million b/d; up 1.3 million b/d

from a low of 4.95 million b/d in 2008; 2013 is expected to show afurther increase of 370,000 b/d; including natural gas liquids, whichcome mostly from shale gas, total liquids production was about 9million b/d.

US gas production was as low as 46 bcf/d in September 2005; by theend of 2011 it was 66 bcf/d; in that period shale gas production rosefrom 1.4 bcf/d in 2005 to 20 bcf/d in 2011.

Forecasts for US liquids production (crude oil plus NGLs) for 2025are 14 million b/d; the EIA gas forecast for 2035 is production of 76bcf/d, half of which will be shale gas.

HOW MUCH SUPPLY IS THERE? US crude production in 2012 was 6.3 million b/d; up 1.3 million b/d

from a low of 4.95 million b/d in 2008; 2013 is expected to show afurther increase of 370,000 b/d; including natural gas liquids, whichcome mostly from shale gas, total liquids production was about 9million b/d.

US gas production was as low as 46 bcf/d in September 2005; by theend of 2011 it was 66 bcf/d; in that period shale gas production rosefrom 1.4 bcf/d in 2005 to 20 bcf/d in 2011.

Forecasts for US liquids production (crude oil plus NGLs) for 2025are 14 million b/d; the EIA gas forecast for 2035 is production of 76bcf/d, half of which will be shale gas.

Given the very short production history of both gas and oil fromshale, measuring the currently economic resource is complex; forexample, in 2008 when shale gas production began in the Marcellusplay the technically recoverable resource was put at 410 Tcf; in 2010USGS lowered this to 84 Tcf and in 2012 EIA raised it to 141 Tcf.

An intrinsic characteristic of all shale plays is their extremely highinitial decline rate, 65%/year or more; this results in low recoveryfactors and a shorter economic field life; part of the uncertainty forboth shale gas and tight oil production is that geologists do notentirely understand the physical mechanisms at the molecular levelwhich are taking place when production occurs in response tohydraulic fracturing.

HOW MUCH SUPPLY IS THERE? - 2

Given the very short production history of both gas and oil fromshale, measuring the currently economic resource is complex; forexample, in 2008 when shale gas production began in the Marcellusplay the technically recoverable resource was put at 410 Tcf; in 2010USGS lowered this to 84 Tcf and in 2012 EIA raised it to 141 Tcf.

An intrinsic characteristic of all shale plays is their extremely highinitial decline rate, 65%/year or more; this results in low recoveryfactors and a shorter economic field life; part of the uncertainty forboth shale gas and tight oil production is that geologists do notentirely understand the physical mechanisms at the molecular levelwhich are taking place when production occurs in response tohydraulic fracturing.

Unlike conventional oil and gas where fields are discreetly dispersedand geologically disconnected, resources are continuous resulting in85-95% success rates when drilling in a shale basin.

EIA has estimated that the US has 3,700 Tcf of shale gas in place ofwhich 482 Tcf are considered technically recoverable; elsewhere inthe world EIA estimates a further 5,600 Tcf in-place resource.

In 2012 the EIA estimated that the US had original oil in-place in alltight oil plays of 1,984 billion barrels. (1,845 billion in the 6 largest) ofwhich total 33 billion barrels are considered as currently technicallyrecoverable (1.7% of the oil in place).

HOW MUCH SUPPLY IS THERE? - 3

Unlike conventional oil and gas where fields are discreetly dispersedand geologically disconnected, resources are continuous resulting in85-95% success rates when drilling in a shale basin.

EIA has estimated that the US has 3,700 Tcf of shale gas in place ofwhich 482 Tcf are considered technically recoverable; elsewhere inthe world EIA estimates a further 5,600 Tcf in-place resource.

In 2012 the EIA estimated that the US had original oil in-place in alltight oil plays of 1,984 billion barrels. (1,845 billion in the 6 largest) ofwhich total 33 billion barrels are considered as currently technicallyrecoverable (1.7% of the oil in place).

REDUCTIONS IN NET OIL IMPORTS TO THE U.S. BYSOURCE IN IEA’S NEW POLICIES SCENARIO,

2011-2035

Source: International Energy Agency, World Energy Outlook 2012

WHAT AMERICA MIGHT DO WITH ITS NATURAL GASBONANZA

• A revival in energy intensive industries such as petrochemicals, fertilizer, steel,glass etc; investments are already well underway.

• Export as LNG to Asia and Europe. Numerous projects have been proposed butthere are significant hurdles: major influential interest groups including electricand gas utilities, utility regulators, large industrial users and environmentalgroups that are opposed to the granting of export licenses.

• Use of gas as a transportation fuel to displace the approximately 9 million bbl/dayof oil imports. To replace this entirely would require about 20 Tcf per year ofnatural gas for use as CNG (in cars), LNG (in trucks) or to feed GTL plants. Thiswould involve almost a doubling of 2012 U.S. gas production of 25.3 Tcf.

• Complete replacement of all coal-fired and nuclear generation would require anestimated additional 20 Tcf of natural gas production. Coal in the last 3 years haslost a substantial portion of generation to natural gas, but this is due to not onlythe competitiveness of gas prices but also a significant tightening of emissionslegislation.

• A revival in energy intensive industries such as petrochemicals, fertilizer, steel,glass etc; investments are already well underway.

• Export as LNG to Asia and Europe. Numerous projects have been proposed butthere are significant hurdles: major influential interest groups including electricand gas utilities, utility regulators, large industrial users and environmentalgroups that are opposed to the granting of export licenses.

• Use of gas as a transportation fuel to displace the approximately 9 million bbl/dayof oil imports. To replace this entirely would require about 20 Tcf per year ofnatural gas for use as CNG (in cars), LNG (in trucks) or to feed GTL plants. Thiswould involve almost a doubling of 2012 U.S. gas production of 25.3 Tcf.

• Complete replacement of all coal-fired and nuclear generation would require anestimated additional 20 Tcf of natural gas production. Coal in the last 3 years haslost a substantial portion of generation to natural gas, but this is due to not onlythe competitiveness of gas prices but also a significant tightening of emissionslegislation.

ABUNDANT NATURAL GAS AND NGLS ARE REVIVINGENERGY INTENSIVE INDUSTRIES - 1

• Dow Chemical in a study has identified over $90 billion worth ofpetrochemical projects announced in 2011 and 2012. E.g.:– Chevron Phillips Chemical is building a $1.5 million tpy greenfield

ethylene plant in Baytown TX.– Shell Chemical is building a greenfield ethylene plant in Monaca, PA.– Dow Chemical is building a $1.5 million tpy ethylene plant in Freeport

TX and is restarting a previously closed ethylene plant.– Invictus LLC has proposed a greenfields ethylene cracker for WV.– Williams Co is building a $600 million lb/year ethylene expansion at

Geismar LA.– Formosa Plastics Corp. has a $1.7 billion expansion underway at its

Point Comfort petrochemical plant– Sasol is planning a greenfield ethylene cracker for Louisiana

• Dow Chemical in a study has identified over $90 billion worth ofpetrochemical projects announced in 2011 and 2012. E.g.:– Chevron Phillips Chemical is building a $1.5 million tpy greenfield

ethylene plant in Baytown TX.– Shell Chemical is building a greenfield ethylene plant in Monaca, PA.– Dow Chemical is building a $1.5 million tpy ethylene plant in Freeport

TX and is restarting a previously closed ethylene plant.– Invictus LLC has proposed a greenfields ethylene cracker for WV.– Williams Co is building a $600 million lb/year ethylene expansion at

Geismar LA.– Formosa Plastics Corp. has a $1.7 billion expansion underway at its

Point Comfort petrochemical plant– Sasol is planning a greenfield ethylene cracker for Louisiana


• Methanol production from natural gas is also getting a major boost. E.g.:– Celanese Corp is building a new $1.3 million tpy methanol plant in Clear

Lake TX.– Methanex is relocating a million tpy methanol plant from Chile to

Geismar, LA; the company is also considering a second such relocation.• Fertilizer production is also reviving. After closing more than 2 dozen

ammonia plants between 1998-2004 the first large scale new plants in 20years are being built, E.g.:

• Orascom Construction of Egypt is building a $1.4 billion plant in Iowa.• C.F. Industries has announced a $2 billion expansion of existing

facilities by 2016.• The steel industry is another beneficiary of cheap gas, E.g.:

– Nucor Corp is building an iron ore upgrader in LA; the previous plant atthe site had been dismantled and relocated to Trinidad.

– Voestalpine is planning a new hot briquetted iron plant in NorthAmerica.

• Methanol production from natural gas is also getting a major boost. E.g.:– Celanese Corp is building a new $1.3 million tpy methanol plant in Clear

Lake TX.– Methanex is relocating a million tpy methanol plant from Chile to

Geismar, LA; the company is also considering a second such relocation.• Fertilizer production is also reviving. After closing more than 2 dozen

ammonia plants between 1998-2004 the first large scale new plants in 20years are being built, E.g.:

• Orascom Construction of Egypt is building a $1.4 billion plant in Iowa.• C.F. Industries has announced a $2 billion expansion of existing

facilities by 2016.• The steel industry is another beneficiary of cheap gas, E.g.:

– Nucor Corp is building an iron ore upgrader in LA; the previous plant atthe site had been dismantled and relocated to Trinidad.

– Voestalpine is planning a new hot briquetted iron plant in NorthAmerica.


• Barclays Capital in December 2012 estimated that by 2020 theseannounced projects will add between 1.3 and 2.2 Tcf of incremental gasconsumption.

• Citigroup Inc. has estimated that increased oil and gas production activitywill by 2020 add 3.6 million new jobs and increase GNP by up to 2.0 to3.3%. HSBC estimates that the gas boom will add 1.0 to GNP growth.

• Barclays Capital in December 2012 estimated that by 2020 theseannounced projects will add between 1.3 and 2.2 Tcf of incremental gasconsumption.

• Citigroup Inc. has estimated that increased oil and gas production activitywill by 2020 add 3.6 million new jobs and increase GNP by up to 2.0 to3.3%. HSBC estimates that the gas boom will add 1.0 to GNP growth.

WORLDWIDE GAS PLANT CONSTRUCTION a,2011-2012

Country/Region 2011 2012

Africa --- ---Asia-Pacific 1 ---Canada 1 3Eastern Europe 1 1Middle East --- ---Latin America 1 ---U.S. 7 13Western Europe --- 1

Total 11 18

Country/Region 2011 2012

Africa --- ---Asia-Pacific 1 ---Canada 1 3Eastern Europe 1 1Middle East --- ---Latin America 1 ---U.S. 7 13Western Europe --- 1

Total 11 18

Notes: a Includes new plants, expansions and modifications scheduled for completion in the year listed.

Source: Oil and Gas Journal 7/05/12

NEW EXPANDED NGL PIPELINES IN SHALE GAS BASINS

Source: PennWell MAPSearch, Houston

NEW GAS PLANTS, FRACTIONATORS ANDPETROCHEMICAL PLANTS IN APPALACHIA


NEW GAS PLANTS, FRACTIONATORS ANDPETROCHEMICAL PLANTS IN

TEXAS-LOUISIANA-OKLAHOMA


U.S./ CANADIAN LNG EXPORTS - 1• Of the estimated 71 million tpy (1 million tonnes= 1.36 Bcm or 48 Bcf) of

LNG liquefaction capacity that came online in 2009-2011, some 26% wasintended for North America; some of this will be imported to the U.SNortheast to offset pipeline constraints.

• There are now 12 LNG export projects in the mainland US, 3 in Canada and2 in Alaska. These total 186 million tpy (68% of 2012 global exportcapacity) plus a further 23 million tpy in Alaska.

• Permitting for LNG exports is straight forward involving the FERC and theU.S. Department of Energy; it is even easier in Canada where the processis entirely in the hands of the National Energy Board.

• The U.S. FERC has exclusive authority over applications for siting,construction, expansion and operation under the Natural Gas Act and theEnergy Policy Act of 2005. The FERC monitors all construction to ensurecompliance with federal, state and local regulations. Preparation of anEnvironmental Impact Statement and a resource report take 1 to 2 years.

• Of the estimated 71 million tpy (1 million tonnes= 1.36 Bcm or 48 Bcf) ofLNG liquefaction capacity that came online in 2009-2011, some 26% wasintended for North America; some of this will be imported to the U.SNortheast to offset pipeline constraints.

• There are now 12 LNG export projects in the mainland US, 3 in Canada and2 in Alaska. These total 186 million tpy (68% of 2012 global exportcapacity) plus a further 23 million tpy in Alaska.

• Permitting for LNG exports is straight forward involving the FERC and theU.S. Department of Energy; it is even easier in Canada where the processis entirely in the hands of the National Energy Board.

• The U.S. FERC has exclusive authority over applications for siting,construction, expansion and operation under the Natural Gas Act and theEnergy Policy Act of 2005. The FERC monitors all construction to ensurecompliance with federal, state and local regulations. Preparation of anEnvironmental Impact Statement and a resource report take 1 to 2 years.

U.S./ CANADIAN LNG EXPORTS - 2

• The current barrier holding up almost all proposals are authorization-to-export permits, one for free-trade agreement countries (e.g. S. Korea) andone for non-FTA countries. (e.g. EU, Japan, China) issued by theDepartment of Energy (DOE). The DOE considers various issues includingdomestic need and the public interest. There is much discretion ininterpreting the latter and the decisions will be essentially political.

• Even with permits in hand, it may be difficult for shale gas suppliers to signconventional international LNG contracts with reserve dedication.

• Longer term it may be that the economics of LNG exports to Asia are moreattractive than those to Europe.

• The current barrier holding up almost all proposals are authorization-to-export permits, one for free-trade agreement countries (e.g. S. Korea) andone for non-FTA countries. (e.g. EU, Japan, China) issued by theDepartment of Energy (DOE). The DOE considers various issues includingdomestic need and the public interest. There is much discretion ininterpreting the latter and the decisions will be essentially political.

• Even with permits in hand, it may be difficult for shale gas suppliers to signconventional international LNG contracts with reserve dedication.

• Longer term it may be that the economics of LNG exports to Asia are moreattractive than those to Europe.

Note: Updated January 7, 2013

Source: Bloomberg, ICE

Note: Data is in US$/MMBtu. Last updated January 15, 2013 .

Source: Waterborne Energy, Inc

WHAT IT TAKES TO BE A SUCCESSFULSHALE GAS PRODUCING NATION

• Relatively shallow reserves; the presence of NGL’s is also helpful.

• A large technically sophisticated and entrepreneurially driven gasproduction and service industry.

• A large experienced blue collar and technical labour pool.

• Control of mineral rights in the hands of surface owners.

• Generally friendly and experienced regulatory agencies.

• A dense network of pipelines.

• Strong, diverse source of demand: heating, electric generation,chemical industry, transportation (?), LNG exports (?).

•Access to reasonable amounts of water.

• Relatively shallow reserves; the presence of NGL’s is also helpful.

• A large technically sophisticated and entrepreneurially driven gasproduction and service industry.

• A large experienced blue collar and technical labour pool.

• Control of mineral rights in the hands of surface owners.

• Generally friendly and experienced regulatory agencies.

• A dense network of pipelines.

• Strong, diverse source of demand: heating, electric generation,chemical industry, transportation (?), LNG exports (?).

•Access to reasonable amounts of water.

UNITED STATES NATURAL GAS PIPELINES

Source: IEA 2012

SOUTHEAST ASIAN NATURAL GAS PIPELINES

Source: IEA 2012

RISKED GAS IN-PLACE AND TECHNICALLYRECOVERABLE SHALE GAS RESOURCES:

SIX CONTINENTS

Continent Risked Gas In-Place(Tcf)

Risked TechnicallyRecoverable

(Tcf)

North America 3,856 1,069

South America 4,569 1,225

Europe 2,587 624Europe 2,587 624

Africa 3,962 1,042

Asia 5,661 1,404

Australia 1,381 396

Total 22,016 5,760

Source: US Energy Information Administration

U.S.13%

Europe10%

Other Asia8%

China19%

ONE VIEW OF SHARES OF GLOBALSHALE GAS RESERVES

Canada6%

SouthAmerica

28%

Africa16%

Other Asia8%

Source: Barclays Capital; Financial Times 12/09/12

HOW MUCH DOES SHALE GAS COST? - 1

• Current gas prices make the industry unsustainable except for liquid rich plays.

•This assumes no further increase in costs due to new well completion or fracwater disposal regulations arising out of the EPA’s current review ofhydraulic fracturing.

• For production costs numbers are all over the place, but all are much above2012 market prices.

• Some sample estimates:− Aubrey McClendon, CEO of Chesapeake Energy (number 2 producer):

industry unsustainable at $5.00/mcf.− Bernstein Research: cost of finding, developing and operating requires

Henry Hub price of $7.50-8.00/mcf.− Wood McKenzie and EPRINC have developed supply curves for each play;

Marcellus, Haynesville and core areas of Barnett are below $4.00/mcf;non-core areas of the Barnett and Fayetteville are in a range of$5.00-6.00/mcf.

• Current gas prices make the industry unsustainable except for liquid rich plays.

•This assumes no further increase in costs due to new well completion or fracwater disposal regulations arising out of the EPA’s current review ofhydraulic fracturing.

• For production costs numbers are all over the place, but all are much above2012 market prices.

• Some sample estimates:− Aubrey McClendon, CEO of Chesapeake Energy (number 2 producer):

industry unsustainable at $5.00/mcf.− Bernstein Research: cost of finding, developing and operating requires

Henry Hub price of $7.50-8.00/mcf.− Wood McKenzie and EPRINC have developed supply curves for each play;

Marcellus, Haynesville and core areas of Barnett are below $4.00/mcf;non-core areas of the Barnett and Fayetteville are in a range of$5.00-6.00/mcf.

HOW MUCH DOES SHALE GAS COST? - 2

− Ziff Energy has looked at British Columbia and Alberta shales;“full cycle” supply costs of C$ 5.00-5.50/mcf with a range of C$ 4.00-7.50+

− Berman and Pittinger examined well-by-well data for the Barnett, Fayettevilleand Haynesville plays: $8.00-9.00/mcf to break even on full cycle costsand $ 5.00-6.00 on “point-forward” costs

WATER INTENSITY OF VARIOUS ENERGY SOURCES

Gallons/mmBtuCoal

Surface Mining 2Underground Mining 9

Natural GasConventional 0

Noble Energy DataVertical 6.9Horizontal 4.3

OilPrimary 1.5Oil Shale 5.5Conventional Flooding 14Oil Sand 35Enhanced Recovery 62

BiofuelsEthanol from irrigated corn 11,000Biodiesel from soy 60,000Biodiesel from rapeseed 68,000

Gallons/mmBtuCoal

Surface Mining 2Underground Mining 9

Natural GasConventional 0

Noble Energy DataVertical 6.9Horizontal 4.3

OilPrimary 1.5Oil Shale 5.5Conventional Flooding 14Oil Sand 35Enhanced Recovery 62

BiofuelsEthanol from irrigated corn 11,000Biodiesel from soy 60,000Biodiesel from rapeseed 68,000

Source: E. Mielke, L.D. Anadon, and V Narayanamurti, Discussion Paper 2010-15, Harvard, Kennedy School,Belfer Center for Science and International Affairs; S. Goodwin, Ken Carlson, C. Douglas and Ken Knox,Oil and Gas Journal 7/05/12, pp. 48-59

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