PacWest at Latin America Unconventional Gas Conference

Supply Chain & Infrastructure ChallengesLatAm UCG PresentationBuenos Aires, Argentina13 September 2011Alexander Robartarobart@pacwestcp.com+1 202 670 8027 PacWest Consulting Partners 7941 Katy Freeway, Suite 309 Houston, TX 77024

LATAM UCG CONFERENCE PRESENTATION Agenda 1) Introduction 2) NA Unconventional Story & Current State of Market 3) Supply Chain & Infrastructure Implications 4) International Unconventional Development 5) US Analogue: Bakken 6) About PacWest 7) Questions © PacWest 2011 | All rights reserved | 2

LATAM UCG CONFERENCE PRESENTATION PacWest is a boutique strategy consultancy and market intelligence firm that specializes in unconventional oil & gas PacWest Business Overview Consulting & Advisory Market Intelligence Products  Provide strategy consulting and advisory  Launched market intelligence business 6 services to unconventional O/G operators months ago due to lack of information on and suppliers, including: unconventional supply market - Super Majors  Core product: Shale Supply Market Service - Independents (incl. international) - Analysis of unconventional - Big 4 service companies supply/demand and supplier database - Independent pressure pumpers - Emphasis on frac market - Frac equipment manufacturers - Includes ground-breaking Pressure Pumping Monitoring Service: granular  Strength in supply market North American fleets/capacity detail by - Often work with operator procurement region and supply chain groups, helping analyze  Nearing completion of proprietary Frac supply/demand, develop sourcing Database that includes detailed data set of strategies, building capabilities, etc. North American fracs – unique in market  With suppliers, often work at CXO or - Launching monthly Frac Analysis product business lead level - Frac Database subscriptions available  Offer unique market intelligence capabilities © PacWest 2011 | All rights reserved | 3

LATAM UCG CONFERENCE PRESENTATION Since 1990, shale gas production has exploded from zero to close to 90 bcm – it now accounts for nearly one-quarter of US production US Shale Gas Production (bcm) Source: EIA, Annual Outlook for 2011 © PacWest 2011 | All rights reserved | 5

LATAM UCG CONFERENCE PRESENTATION North American natural gas production is forecast to be driven largely by eight US and Canadian plays North American Shale Gas Production Additions (Bcfpd) Source: Macquarie Tristone © PacWest 2011 | All rights reserved | 6

LATAM UCG CONFERENCE PRESENTATION By 2030, shale gas is forecast to make up nearly half of US natural gas production US Dry Gas Production (Tcf/year) Shale + Tight Gas = 67% Source: EIA, Annual Outlook for 2011 © PacWest 2011 | All rights reserved | 7

LATAM UCG CONFERENCE PRESENTATION There are now dozens of active plays in the US, but demand is straining the existing supply chain and infrastructure in five hot spots Today’s US Hot Spots DJ Basin/Niobrara Bakken Granite Wash Permian Basin Eagle Ford Source: PacWest © PacWest 2011 | All rights reserved | 8

LATAM UCG CONFERENCE PRESENTATION These five hot spots have a several characteristics in common, but one most importantly: liquids-rich!! US Unconventional Trends Liquids-rich ■ Oily or “liquids-rich” formations are the primary driver of US unconventional activity today; why? Oil and gas price divergence - Driven by simple economics: WTI = $88 / Gas = $4; associated gas  med-term low gas price Increasing Service Intensity ■ Liquids formations demanding ever greater services: equipment, frac stages, proppant, chemicals, etc. Pressure Pumping Market Growing ■ Oil economics and increased service intensity driving major NA pressure pumping market growth ■ International unconventional potential means 3-yr NA upmarket cycle could extend to 5+ yrs Supply Markets Tight ■ Strong demand means that supply of critical products/services tight, particularly in hot plays Service Companies Have Leverage ■ With tight markets, relationship between operators and suppliers shifting © PacWest 2011 | All rights reserved | 9

LATAM UCG CONFERENCE PRESENTATION On the demand side, US Land rig count has rebounded dramatically since 2009 lows, driving demand of pressure pumping services US Land Rig Count (Aug 2009 – Aug 2011) 2,500 2,000 1,500 Land Rigs 1,000 500 0 Nov-09 Nov-10 Sep-09 Feb-10 May-10 Sep-10 Feb-11 Aug-09 Oct-09 Dec-09 Jan-10 Mar-10 Apr-10 Jun-10 Jul-10 Aug-10 Oct-10 Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Source: Baker Hughes © PacWest 2011 | All rights reserved | 10

LATAM UCG CONFERENCE PRESENTATION The focus on oily plays is evident in the US Land rig count: oil drilling activity finally overtook gas drilling activity in early 2011 US Land Rig Count – Oil vs. Gas (Aug 2009 – Aug 2011) 100% 90% Oil 80% Gas Percentage of Land Rigs 70% 60% 50% 40% 30% 20% 10% 0% Sep-09 Nov-09 Feb-10 Sep-10 Nov-10 Feb-11 Oct-09 Dec-09 Mar-10 Apr-10 Jun-10 Jul-10 Dec-10 Apr-11 Jun-11 Jul-11 Jan-10 May-10 Oct-10 Mar-11 Jan-11 May-11 Aug-09 Aug-10 Source: Baker Hughes © PacWest 2011 | All rights reserved | 11

LATAM UCG CONFERENCE PRESENTATION The dominance of unconventionals is also evident in the US Land rig count: increases in directional drilling has driven the rig count US Land Rig Count – Dir/Hor vs. Vert (Aug 2009 – Aug 2011) 2,500 Directional/Horizontal 2,000 Vertical 1,500Land Rigs 1,000 500 0 Sep-09 Nov-09 Feb-10 Sep-10 Nov-10 Feb-11 Oct-09 Dec-09 Mar-10 Apr-10 Jun-10 Jul-10 Oct-10 Dec-10 Mar-11 Apr-11 Jun-11 Jul-11 Jan-10 May-10 Jan-11 May-11 Aug-09 Aug-10 Source: Baker Hughes © PacWest 2011 | All rights reserved | 12

LATAM UCG CONFERENCE PRESENTATION Most analysts expect the rig count to increase through 2014 US Land Average Rig Count Forecast (2011-2014) 2,500 Current: 1,740 rigs (8/19/11) 2,020 2,089 2,000 1,950 1,709 1,500 Land Rigs 1,000 500 0 2011 2012 2013 2014 Source: PacWest Analysis; Macquarie © PacWest 2011 | All rights reserved | 13

LATAM UCG CONFERENCE PRESENTATION The US Land pressure pumping market is significantly under-supplied 2011 Supply and Demand Balance – US Land Pressure Pumping 200% 180% Backlog New Completions Pressure Pumping Capacity Utilization 160% 11,935,890 HHP 140% 9% 735,890 HHP 120% 3,401,640 HHP 8,534,250 HHP 100% 80% GAP PRESENTS 131% 11,200,000 HHP 60% CHALLENGE 100% 40% 20% 0% Supply Demand The under-supply is not expected to be relieved until late 2012 or early 2013 Source: CIBC World Markets; Macquarie; PacWest analysis © PacWest 2011 | All rights reserved | 14

LATAM UCG CONFERENCE PRESENTATION Agenda 1) About PacWest 2) NA Unconventional Story & Current State of Market 3) Supply Chain & Infrastructure Implications 4) International Unconventional Development 5) US Analogue: Bakken 6) About PacWest 7) Questions © PacWest 2011 | All rights reserved | 15

LATAM UCG CONFERENCE PRESENTATION Unconventional O/G carries with it significant supply chain and infrastructure implications Unconventional Supply Chain & Infrastructure Implications Competition & Innovation Key ■ Technology and innovation made shale a reality; requires entrepreneurial supply chain to optimize for each unique unconventional formation ■ US has deepest and most entrepreneurial O/G supply chain, competitive environment Higher Service Intensity ■ Shale demands increased products/services, requiring more people, more equipment, more consumables (water, proppant, chemicals), more transportation infrastructure Advanced Equipment and Experience Required ■ Most equipment and people will be imported initially; how friendly is import regime? Infrastructure Availability Key ■ Production profile of shale gas wells is shorter and steeper than for conventional, so drilling campaigns have to be closely coordinated with evacuation/take-away projects - Delay in infrastructure can significantly impact economics NA Supply Markets Tight Today ■ NA rewards high; opportunity cost deploying equipment to uncertain region? © PacWest 2011 | All rights reserved | 16

LATAM UCG CONFERENCE PRESENTATION A NA unconventional operator forecasts that pressure pumping, rigs, and water will drive nearly 60% of 3-year 3rd party costs across 3 plays Operator 3rd Party Spend by Category (3-yr) Stimulation/Completion = 39% 0 0 39% 0 % of Total 3-Yr Spend 0 0 Drilling Rigs = 11% 0 Water Treatment/Disposal = 9% 0 11% OCTG = 8% D&C Fluids= 4% 0 9% 8% Contract Labor = 4% 4% 4% 4% 3% 0 3% 3% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% 0% 0% 0 Source: PacWest Analysis; Macquarie © PacWest 2011 | All rights reserved | 17

LATAM UCG CONFERENCE PRESENTATION Global pressure pumping capacity is the single largest supply limitation to a rapid ramp up of global shale development Unconventional Supply Chain & Infrastructure Implications Source: Halliburton Analysis;, Barclay’s CEO Energy-Power Conference, Sep 2011 © PacWest 2011 | All rights reserved | 18

LATAM UCG CONFERENCE PRESENTATION Pressure pumping demands significant quantities of consumables, which complicate sourcing and logistics Pressure Pumping Consumables Water Proppant Chemicals  Average Eagle Ford frac  Average Bakken frac  Huge volumes of requires 3-5 million requires 1.5 million lbs chemicals used during gallons (80,000- of sand – equivalent to completion 120,000 bbls) of water 15 rail cars  Chemicals blends used  Water must be  North American supply are highly specific to a sourced, potentially is already extremely particular formation – pre-treated, and tight, though many key elements of transported to frac site new projects coming innovation via trucks or pipes online over next 18  There are already  10-40% of water flows months shortages of some key back over 30-day  Logistics costs 50+% of chemical inputs period – what do you sand costs within NA  Logistics of getting do with flowback?  What are economic chemicals to site - Treat it? sources of proppant in challenging in areas - Dispose it? Argentina? with limited Source: PacWest analysis infrastructure © PacWest 2011 | All rights reserved | 19

LATAM UCG CONFERENCE PRESENTATION A recent study on global shale gas resources sized up resources across 14 regions outside the US Global Shale Resources Source: EIA, World Shale Gas Resources Report © PacWest 2011 | All rights reserved | 21

LATAM UCG CONFERENCE PRESENTATION A new study by the Baker Institute forecasts shale gas production across key regions through 2040 Global Shale Resource Estimates & Production Forecasts Global Shale Resource Estimates (bcf) Gas Production Forecasts (tcf) India 63 70 France 180 India 60 Poland 187 France Brazil 226 50 Poland Algeria 231 Brazil Libya 290 40 Algeria Canada 388 Libya 30 S Africa 485 Canada Mexico 681 20 Mexico Agentina 774 Argentina USA 862 10 USA China 1,275 China 0 - 200 400 600 800 1,000 1,200 1,400 2010 2015 2020 2025 2030 2035 2040 Source: EIA, World Shale Gas Resources Report; Baker Institute, Shale Gas and US National Security © PacWest 2011 | All rights reserved | 22

LATAM UCG CONFERENCE PRESENTATION However, more than just technically recoverable resources are required to successfully produce unconventionals; many critical risk factors Non-Technical Risks Factors Demand  The level of natural gas demand within the country and neighboring countries that can serve as consumers Direct Supply Chain  Quality of existing supply chain, number of rigs currently in-country, ease of entry for new players, etc. Domestic E&P  Number of existing domestic E&P firms, level of Industry unconventional experience, ease of entry, etc. Indirect Direct Indirect Indirect Markets  Regulatory structure, midstream/downstream demand dynamics, etc. Regulatory  Fragmentation, tax policies, government incentives for Frameworks unconventional development, etc. Infrastructure  Quality of existing midstream, ease of developing new infrastructure, etc. Development  Water, population densities, political/social acceptance, Constraints etc. Source: PacWest Analysis © PacWest 2011 | All rights reserved | 23

LATAM UCG CONFERENCE PRESENTATION Besides Argentina, China and Poland have made the most progress in exploring their shale acreage Shale Status: China & Poland China Poland  Multiple US majors active in China  Multiple wells drilled by key operators under JVs (i.e. PGNiG) with gas shows from  Early exploration work progressing in multiple wells target basins  SLB recently completed 13-stage frac for  Promising frac equipment JV 3Legs Resources relationships set up to supply  Exploration programs on-going with manufacture frac pumps in China (Weir many more wells to drill under SPM and Shengli Highland) concession minimum requirements  Strong incentives to encourage  Capital beginning to flow to develop production domestic supply chain  Proven capability and commitment to  Logistics/ transportation issues already building infrastructure emerging © PacWest 2011 | All rights reserved | 24

LATAM UCG CONFERENCE PRESENTATION Australia has made significant progress on CBM, while India has a long way to go on shale Shale Status: Australia & India Australia India  Strong geology, economic incentives,  Geology still uncertain – SLB fraced regulatory framework wells for ONGC in West Bengal  Making significant progress towards (Damodar Valley Basin) and Assam significant CBM production  Economic incentives and regulatory  Numerous domestic and international framework still TBD operators participating  DGH has delayed shale concession  Significant supply chain bottlenecks round several times – currently targeted emerging across multiple products/ for 2012 Q1 services – need for greater supply chain  Resources relatively small, but growing support energy demand and limited domestic  Infrastructure availability inland poses resources mean they are important challenges  Major challenges developing  Shale exploration still early stage infrastructure in the country do not bode well for pace of development  Water sourcing for fracing will present challenges  Will likely be 3-5 years behind China © PacWest 2011 | All rights reserved | 25

LATAM UCG CONFERENCE PRESENTATION There have been some recent roadblocks to shale production in select countries around the world Global Shale Resources ■ Sweden: Has seen protests to ■ Canada: Quebec put temporary Shell’s exploration activity moratorium in place ■ UK: Has seen protests, then embrace by government; Cuadrilla put its exploration activities on hold after minor ■ EU: Considering stricter seismic activities during drilling shale guidelines to the protests of Poland ■ France: Recently put a shale ■ India: Licensing round moratorium in place, putting delayed until 2012 Q1 exploration activity in the highly promising Paris Basin on hold for now ■ South Africa: Temporary moratorium in place pending assessment of environmental impact report – government recently requested a new version of the report, delaying Source: EIA, World Shale Gas Resources Report release another 6 months © PacWest 2011 | All rights reserved | 26

LATAM UCG CONFERENCE PRESENTATION One thing to keep in mind is how supply chain needs differ for exploration versus development phases Exploration vs. Development Phase Exploration Phase Development Phase  Data collection exercise  Supply chain development and mgmt  Goal: collect enough data to prove that  Goal: build a long-term supply base that hydrocarbons are present will help you reduce costs and optimize  Priorities: speed, logistical simplicity production, while minimizing risks  Willingness-to-pay: relatively high  Priorities: cost management, diversification  Staffing: in-country team small  Willingness-to-pay: low to moderate  Staffing: build local resources Implications  Bundling strategies are common to  More likely to distribute work between simplify logistics, mgmt, admin majors and local players  Work with local equipment providers  Willing to invest time/effort in building (i.e. rigs) if possible for speed local supply base  Big 4 and majors often best positioned  Fwd-looking sourcing strategies © PacWest 2011 | All rights reserved | 27

LATAM UCG CONFERENCE PRESENTATION The US Bakken play has boomed over last two years, placing significant strains on existing infrastructure and supply chain The Bakken Formation US Analogue: Bakken Formation  Huge contiguous oil accumulation spanning North Dakota and Wyoming in the US, Saskatchewan and Manitoba in Canada - ~14,700 square-miles; largest ever assessed by USGS Challenges  Existing infrastructure limited  Has seen tremendous growth over last two years  Growth has placed major strains on the supply chain  Effectively starting from zero Source: Continental Resources © PacWest 2011 | All rights reserved | 29

LATAM UCG CONFERENCE PRESENTATION Since late-2009, the rig count has increased 2.5-times with counts forecast at 200+ rigs beyond this year Bakken Rig Count & Forecast Rig Count – Dir/Hor vs. Vertical Average Rig Count Forecast Land Rigs Land Rigs200 Current: 184 rigs (8/19/11) 250180 Directional/Horizontal 220 210160 Vertical 200 200140 180120 150100 80 60 100 40 20 50 0 Dec-09 Dec-10 Aug-09 Oct-09 Aug-10 Oct-10 Jun-10 Jun-11 Feb-10 Apr-10 Feb-11 Apr-11 0 2011 2012 2013 2014 Source: PacWest Analysis; Macquarie; Baker Hughes © PacWest 2011 | All rights reserved | 30

LATAM UCG CONFERENCE PRESENTATION Overwhelming demand in the Bakken is expected to lead to a significant under-supply of pressure pumping capacity for 2011 Sensitivity Analysis of 2011 Bakken Pressure Pumping Capacity Utilization 250% 241% 2011 completions + backlog 42% Pressure Pumping Capacity Utilization 201% 200% 2011 completions 35% 161% 150% 28% 121% 21% 199% 100% 100% utilization of 166% 2011 133% 50% 100% capacity 0% 15 20 25 30 Average Stages per Well The Bakken will be 61% under-supplied in 2011, conservatively assuming 20 stages/well Sources: CIBC World Markets; Macquarie; PacWest analysis © PacWest 2011 | All rights reserved | 31

LATAM UCG CONFERENCE PRESENTATION Demand will continue to outpace supply for pressure pumping capacity into 2012 in the Bakken Sensitivity Analysis of 2012 Bakken Pressure Pumping Capacity Utilization 200% 2012 completions + backlog 180% 2012 completions Pressure Pumping Capacity Utilization 160% 159% 152% 146% 140% 140% 45% 100% utilization 43% 42% 120% of 2012 40% capacity 100% 80% 60% 114% 109% 100% 104% 40% 20% 0% 30% 40% 50% 60% Capacity Growth (2011 – 2012) Note: Sensitivity analysis assumes an average of 20 frac stages / well in 2012, a conservative estimate Source: CIBC World Markets; Macquarie; PacWest analysis © PacWest 2011 | All rights reserved | 32

LATAM UCG CONFERENCE PRESENTATION Staffing experienced crews is a critical challenge faced by pressure pumping service providers The Quality vs. Quantity Dilemma ■ Completion increases = HHP increases = Frac crew increases = Need for trained staff!! ■ North American pressure pumping industry is expanding rapidly (~20% YoY increase 2010-2011) and needs to add new hires to meet expansion targets ■ Major increases in completions require major increases in frac crews, for example: - Typical 25K HHP frac fleet in the Bakken requires 2-3 crews of 30 staff = 60 – 90 experienced employees - PacWest forecasts an increase in frac fleets in the Bakken from 38 fleets (May 2011) to 52 fleets (year-end 2011) = 840-1,260 experienced employees ■ Fact: Critical driver of oilfield safety = experienced staff ■ Problem: There are no more experienced field workers left; pumpers are forced to manage deployment of large numbers of inexperienced employees © PacWest 2011 | All rights reserved | 33

LATAM UCG CONFERENCE PRESENTATION Supply chain constraints are holding back the deployment of new equipment and the ability to consistently supply pumping services Bakken Supply Chain Constraints Logistics ■ Railway (primarily BNSF) import capacity into the Bakken is limited for all products, particularly proppant due to the large volumes required (1 railcar has capacity of 200K lbs of proppant; average 3 million lbs frac job requires 15 railcars) Proppant ■ Global proppant consumption has reached unprecedented levels and most domestic producers are essentially sold out of product ■ Greatest constraint is in 20/40 raw sand Guar ■ Demand has reached record highs and the guar supply chain is not highly responsive due to its length (90% of raw guar seed grown in rural India) Equipment ■ Manufacturers of pumping equipment reporting order backlogs of up to 1 year Labor ■ Local labor force in the Bakken is limited and unemployment is extremely low © PacWest 2011 | All rights reserved | 34

LATAM UCG CONFERENCE PRESENTATION Bakken pressure pumping supply has been unable to keep pace with demand so well completion backlogs are growing Days Required for D&C in North Dakota 180 172 Spud and Completion Days between Well 120 107 118 103 90 85 76 87 96 81 82 99 95 98 103 93 60 67 72 67 80 81 50 57 0 Bakken Well Count (May 2011) 500 Number of Wells 400 300 200 100 0 Uncompleted Drilling Permitted Bakken 429 162 413 Montana 57 6 67 North Dakota 372 156 346 Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis © PacWest 2011 | All rights reserved | 35

LATAM UCG CONFERENCE PRESENTATION Operator D&C performance varies, in some cases depending on contracting practices Bakken Ratio of Uncompleted Wells to Active Rigs (May 2011) Well Backlog Rigs Anschutz/OXY 1.0 7 7 Continental Resources 1.8 45 25 Whiting Oil & Gas 1.9 29 15 Zenergy 2.0 12 6 Brigham Oil & Gas 2.4 17 7 ConocoPhillips 2.6 13 5 Hess 2.7 48 18 Slawson 2.8 17 6 Newfield 3.0 15 5 EOG Resources 3.4 34 10 Marathon 3.6 25 7 Oasis Petroleum 4.5 27 6 0 1 2 3 4 5 Note: Well backlog is best estimate based on data from Montana and North Dakota oil/gas regulators; rig count is from April 2011 Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis © PacWest 2011 | All rights reserved | 36

LATAM UCG CONFERENCE PRESENTATION A sampling of some of PacWest’s recent projects demonstrate our depth of experience in North American and international shale Sample of Recent PacWest Consulting Projects ■ Conducted a study of operator sourcing strategies for a large independent North American unconventional E&P operator with a focus on 6 categories: drilling rigs, workover/service rigs, logistics, OCTG, water, and pressure pumping ■ Conducted an innovative economic and strategic analysis of operator all-in shale water management costs over 20-year timeframe, from sourcing all the way through to treatment/disposal, for Bakken and Eagle Ford acreage ■ Conducted a study of the frac pump market focused on supplier strategic plans, manufacturing capabilities, and supply chain structure ■ Analyzed Bakken and Eagle Ford supply/demand and conducted demand planning exercise to develop new pressure pumping sourcing and contract strategy to avoid continued completion delays for a large independent E&P operator ■ Developed Poland unconventional market entry, product/service, and JV strategy for a potential shale service company for a private equity client We have resources in every major unconventional country/region to support international shale needs © PacWest 2011 | All rights reserved | 38

LATAM UCG CONFERENCE PRESENTATION PacWest unique combination of strategic and analytical capabilities with strong market intelligence offer a unique service PacWest Market Intelligence Capabilities PacWest Difference Shale Supply Market Service  Key differentiator: turning market data  Subscription-based market intelligence and intelligence into meaningful and product with quarterly releases actionable information  Includes multiple components:  Transform volumes of disparate market - Unconventional Supplier Database: data, industry insider activity, and field- 100+ suppliers level intelligence and expert input into - Supplier Market Insights report strategic and actionable recommendations for decision-makers - Monthly Frac Analysis report  Aggregate, organize and distill a wide - Pressure Pumping Monitoring report range of data and intelligence to - D&C Cost Escalation report provide information to our clients that is  All components are also available as comprehensive, focused, and strategic stand-alone products  Analyze this information to assess its  Frac Database high value frac data set – strategic implications and provide a first product of its kind available on clear path of action for each stakeholder market © PacWest 2011 | All rights reserved | 39

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PacWest at Latin America Unconventional Gas Conference

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PacWest at Latin America Unconventional Gas Conference — Presentation Transcript