Unconventional Resources and America's Energy Future

Unconventional Resources and America’s Energy Future GIC 4th Annual Rocky Mountain Economic Summit Jackson Hole, Wyoming July 27, 2012 GROWTH EQUITY FOR ENERGY & RESOURCE EFFICIENCY 1

Agenda

2

1

What is driving the shale boom?

2

What has been the result?

3

What does this mean for the U.S.?

4

What about the environmental issues?

5

Where do we see opportunity?

Agenda

3

1

What is driving the shale boom?

2

What has been the result?

3

What does this mean for the U.S.?

4

What about the environmental issues?

5

Where do we see opportunity?

What is shale?

• Source rock and a reservoir • Highly porous, but not permeable • Thin layer deep underground • Not previously economic to develop

4

Unlocking the Resource - Technology Innovation

Finding

Drilling

Producing

5

• Seismic technology refinement (3D) • Accuracy and interpretation improvements

• Subsurface geospatial positioning and directional drilling • Rotary steerable drilling tools • Real-time measurement and logging

• Multi-stage hydraulic fracturing (“frac’ing” or “fracking”) • Micro-seismic monitoring

6

Agenda

7

1

What is driving the shale boom?

2

What has been the result?

3

What does this mean for the U.S.?

4

What about the environmental issues?

5

Where do we see opportunity?

U.S. natural gas resource additions • Shale and tight gas have made huge additions to U.S. recoverable gas reserves (“the Saudi Arabia of gas”) • TRR = 800 trillion cubic feet, or 89 years at current rate of consumption Total Technically Recoverable U.S. Natural Gas Resources (trillion cubic feet)

2,500

2,000 Alaska (onshore and offshore) Shale gas

1,500

Tight gas Coalbed methane

1,000

Lower 48 offshore non-associated Lower 48 onshore non-associated

500 0 2002

8

Source: EIA

2009

U.S. petroleum resource additions • Shale oil more than doubled recoverable oil resources • Oil shale (not to be confused with shale oil), esp. in Green River Basin, could also materially increase resource base (800 billion barrels) Technically Recoverable U.S. Oil Resources (billion barrels)

1,600 1,400 1,200

1,000 Oil Shale

800

Unconventional

600

Total conventional

400

200 2002

9

Source: Institute for Energy Research, EIA

2009

Where are those resources?

Shale gas resources Shale oil resources Region Northeast

Subtotal Gulf Coast

Subtotal Mid-Continent

Subtotal Southwest

Subtotal Rocky Mountain

10

Subtotal West Coast Subtotal Total onshore Lower-48 States

Shale play Marcellus Utica Other Haynesville Eagle Ford Floyd-Neal & Conasauga Fayetteville Woodford Cana Woodford Barnett Barnett-Woodford Avalon & Bone Springs Mancos Lewis Williston-Shallow Niobraran* Hilliard-Baxter-Mancos Bakken Monterey/Santos

Tcf % of total 141 29% No estimate 61 13% 203 42% 75 16% 21 4% 4 1% 100 21% 32 7% 22 5% 6 1% 60 12% 43 9% 32 7% 76 16% 21 4% 12 2% 7 1% 4 1% 43 9% 482 100%

B bbl 3 3 2 2 4 4 15 15 24

% of total 13% 13% 8% 8% 17% 17% 63% 63% 100%

Source: EIA, Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays, July 2011, Marcellus estimate revised 2012

U.S. oil and gas resource additions • Drilling and production activity has opened up in new plays all across the U.S. – Application of horizontal drilling and frac’ing to conventional plays may also increase production

11

Offsets conventional gas declines • Shale gas reserve additions have already offset a decades-long U.S. decline U.S. Dry Gas Proved Reserves and Gross Withdrawals (billion cubic feet)

350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

12

Source: EIA

Offsets conventional oil declines • New shale oil finds are more than sufficient to offset ongoing conventional production declines U.S. Crude Oil Production (million bb/day)

12.00

10.00

8.00

6.00

4.00

2.00

13

0.00 1900

Source: EIA

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

LNG balance of trade reversal • U.S. shale gas is projected to turn the U.S. from a net importer to a net exporter within a decade U.S. Gas Production by Source, Including Net Imports (trillion cubic feet)

30

25

20 Shale gas 15

Tight gas Coalbed methane Conventional

10

Net imports 5

0 1990

14

-5

Source: EIA

1995

2000

2005

2010

2015

2020

2025

2030

2035

What’s next?

• U.S. has been the leader in developing its shale reserves • Significant opportunities in Latin America, Australia, and parts of Europe • Poland and Argentina beginning to develop resources • France and the Netherlands have significant reserves, but have banned frac’ing • China may have the most shale gas of any single country – No significant production to date – Recently set a target of producing 230 Bcf/year by 2015; hopes to produce 2.1-3.5 Tcf/year by 2020 – CNOOC acquisition of Nexen and Chesapeake JVs 15

Global gas reserve additions • Approximate doubling in global gas reserves, especially outside of the Middle East - shifting the world’s energy balance

16

Source: The Economist, from the International Energy Agency and BP

Regional price divergence • Global natural gas market integration via LNG is still many years away.

Natural Gas Prices by Region ($/mmBtu)

$18 $16 $14 $12 $10 $8

Europe Import Price Index

$6

Henry Hub

$4 $2 $0

17

Japan LNG Import Price

Agenda

18

1

What is driving the shale boom?

2

What has been the result?

3

What does this mean for the U.S.?

4

What about the environmental issues?

5

Where do we see opportunity?

Low natural gas prices • Full-cycle cost of shale gas is 40-50% less than full-cycle cost of conventional gas (2011 wells) • Without shale gas, reliance on high levels of LNG imports would cause U.S. natural gas prices to increase by at least 100% • But, with shale gas and shale oil: – Prices are at unprecedented lows – Long-term forecasts expected to remain favorable – Domestic resource stability should remove supply uncertainty and therefore will flatten out price volatility

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Source: IHS Global Insight

Shifting power generation mix • Each percentage point of share is roughly 40 million MWh/year. • By comparison, all solar projects in 2010 produced 1.3 million MWh

20 Source: EIA

Reduced carbon emissions • Switching to natural gas from coal and heating oil can have a significant GHG impact

CO2 Emissions in Power Generation and Heating

CO2 Emissions in Transportation Fuel

(kg CO2 per MMBtu)

(kg CO2 per gallon equivalent)

120

12 96

100

10

73

80

63

60

10.2

9.6

8.9 7.4

8

53

6

40

4

20

2 0

0 Coal

21

Fuel Oil

Propane

Natural Gas

Diesel

B5 Biodiesel

Gasoline

Natural gas

Reduced carbon emissions • Because of the recession and the shift in generation mix, U.S. CO2 emissions are at mid-90’s levels and trending lower U.S. CO2 Emissions from Energy Consumption (million metric tons)

7,000 6,000 5,000 4,000

Natural Gas Coal

3,000

Petroleum 2,000 1,000

1973 1975 1977 1978 1980 1981 1983 1985 1986 1988 1989 1991 1992 1994 1996 1997 1999 2000 2002 2004 2005 2007 2008 2010 2011

0

22 Source: EIA

Economic and employment benefits • Nearly $1.9 trillion in cumulative capex is expected by 2035, leading to substantial economic value added and the creation of more than 1.6 million jobs (NOT including gas transportation infrastructure) 2010

2015

Shale Gas Economic Value Added (1) ($ billion)

$77

$118

$231

Total Government Revenue

($ billion)

$19

$29

$57

Shale Gas Employment (1)

(000 workers)

601

870

1,660

($ billion) ($ billion) 0 ($ billion) 0

$25 $8 $33 $0

$40 $9 $49 $0

$117 $10 $127 $0

Shale Gas Capital Expenditures Upstream Midstream Total (1)

Direct, indirect, and induced Source: IHS CERA

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2035

Predictions • Average reduction of 10% in electricity costs nationwide by 2035 • 2.9% higher industrial production by 2017, 4.7% higher by 2035; chemicals industry to benefit especially • Annual average savings of $926 per year in disposable household income between 2012 and 2015, and >$2,000 per household in 2035

24

Source: IHS Global Insight

So let’s do the math …..

• Low, stable pricing for fuel and electricity, PLUS • Reduced carbon and GHG emissions, PLUS • Shifting transportation fuel mix and required infrastructure Leads to….

• Improved global competitiveness • Jobs creation across much of the U.S. (and particularly depressed areas) • Significant economic lift

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Agenda

26

1

What is driving the shale boom?

2

What has been the result?

3

What does this mean for the U.S.?

4

What about the environmental issues?

5

Where do we see opportunity?

Environmental considerations • • • • • •

27

Aquifer contamination Seismic activity Surface water contamination Drilling solids disposal Air quality Infrastructure wear and tear

Subsurface water contamination?

• Over 1M wells frac’ed in U.S. with no subsurface contamination • Significant distance between frac zone and aquifer • Proper casing & cementing and regulatory oversight are important 28

Seismic activity?

• Yes, however: – Geologically very localized – Magnitude is typically much smaller than the “quakes” a car passing by would cause on the earth’s surface – Negative Richter scale number, or about 1 million times smaller than a typical California tremor – Exceptions: • Large fracs at very shallow depths • Disposal wells, potentially

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Surface fluids and drilling solids • Runoff from surface pits holding drilling solids or flowback/ produced water is a real concern • Hauling water and drilling solids in trucks increases spill risk • Inadequate municipal water treatment capacity/capability where injection wells are unavailable

30

Solutions to surface issues • Closed-loop solids control during well drilling – Eliminate pits – Make efficient use of fluids – Reduce haul-off volume

• Specialized flowback and produced water treatment – Makes clean water available for reuse, reducing disposal volumes 31

Air quality • Less public attention, but a bigger focus among regulators – “Green completion” regulations at EPA and state levels – Limit venting and flaring – Limit truck traffic/reduce emissions – Reduce compressor station emissions

32

Infrastructure wear & tear • Truck traffic is a significant problem in rural areas – Traffic can be reduced through improved water sourcing/disposal and better waste management practices – Regulations/tax regimes to ensure impact is mitigated – Excise or production taxes should be targeted to local economies and infrastructure 33

Agenda

34

1

What is driving the shale boom?

2

What has been the result?

3

What does this mean for the U.S.?

4

What about the environmental issues?

5

Where do we see opportunity?

Where do we see opportunity?

Upstream

Midstream

• Oilfield environmental services • Water services

• Compression, compression optimization, waste heat recovery • Pipeline construction, operations, NDT, maintenance

• Fuel substitution in transportation • Fuel substitution in powergen (e.g. maintenance) Downstream • Negative for renewables

35

Summary • Shale oil and gas development provides enormous benefits to the U.S. and other economies – Technology is still advancing rapidly and only getting better

• Environmental impacts can be controlled with current technology and prudent regulation • Investment opportunities across the value chain 36

David Lincoln Michael Bevan Michael DeRosa Sam Gabbita

david@elementpartners.com michael@elementpartners.com mderosa@elementpartners.com sam@elementpartners.com

3 Radnor Corporate Center Suite 410 Radnor, PA 19087 (610) 964-8004 www.elementpartners.com

GROWTH EQUITY FOR ENERGY & RESOURCE EFFICIENCY 37