Prudent Development

Prudent DevelopmentRealizing the Potential of North America’s Abundant Natural Gas and Oil Resources A Comprehensive Assessment to 2035 with Views through 2050 September 15, 2011 North American Resource Development Study 1

Today’s Discussion•  Study Approach•  What We Learned•  Integrated Findings•  Recommended Strategies for the U.S. North American Resource Development Study 2

Study Objectives•  Assess the N. American resource base – natural gas and oil   Conventional   Unconventional•  Describe the role of technology   Environmental   Operational•  Assess N. American supply and demand   Through 2035   With a view to 2050•  Identify the potential role of natural gas to lower emissions•  Meet national objectives: economic, environmental, security North American Resource Development Study 3

Study Structure Resource and Supply Demand Operations and EnvironmentEnd-Use Emissions and Carbon Regulation Macroeconomics North American Resource Development Study 4

Figure 2. Study Participant Diversity Diverse Study Participation ACADEMIA AND PROFESSIONAL SOCIETIES 6%Study Committee, CONSULTANT/ END CSC, Consultant/ USERS FINANCIAL/ LEGAL Task Groups, Financial/ 7% 14% Legal Subgroups 14% Oil & Gas End Users Industry 13% 41% OIL AND GAS NGO INDUSTRY Over 12% 47% Academia 400 7% Participants NGO GOVT – FEDERAL 7% Gov t – Fed AND STATE & State 17% 14% 400+ PARTICIPANTS; 50+% PARTICIPANTS FROM OUTSIDE THE OIL AND GAS INDUSTRY North American Resource Development Study 5

Study Characteristics•  Multi-Study Approach –  Analyzed hundreds of public studies –  Developed appropriately aggregated and masked proprietary survey•  Diversity of Expertise and Viewpoints –  Over 400 participants –  Broad range of expertise in energy, environmental, and policy North American Resource Development Study 6

Deep Assessment of Environmental and Emissions Issues Operations and the Environment Carbon and Other End-Use Emissions •  Onshore Conventional Natural Gas and Oil Resources •  Emissions Baseline and Projections •  Offshore Conventional Natural Gas and Oil Resources •  Sulfur Dioxide, Nitrogen Oxides, and Mercury •  Unconventional Natural Gas and Oil Resources •  Lifecycle Emissions of Natural Gas and Coal in Power •  History of Innovation in Environmental Stewardship Generation •  History of Natural Gas and Oil Environmental Laws •  Lifecycle Analysis of Natural Gas and Coal in Power Generation •  Environmental Regulation Refinement •  Methane Reduction Programs and Technologies •  Sustainable Strategies and Systems •  Lifecycle Assessments and Footprint Analyses •  Environmental Management Systems (EMS) •  Public-Private Partnerships •  Data Management Systems •  Center for Offshore Safety •  Outer Continental Shelf Safety Oversight Board •  Regulatory Framework on the Outer Continental Shelf •  Lease Sale Planning Process •  Coastal Marine Spatial Planning •  Consideration of Studies on the Deepwater Horizon Incident •  Offshore Operations and Environmental Management Findings North American Resource Development Study 7

Core Findings and Recommendations North American Resource Development Study 8

N.A. Natural Gas Resource Estimates Transform Supply Outlook Figure ES-2. U.S. Natural Gas Technically Recoverable Resources Are Increasing Recent Estimates of Natural Gas Resources 4,000 NATIONAL PETROLEUM COUNCIL (NPC) POTENTIAL GAS COMMITTEE ENERGY INFORMATION ADMINISTRATION/ DEPARTMENT OF ENERGY/MINERALS MANAGEMENT SERVICE INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA ICF INTERNATIONAL, INC. 3,000 MASSACHUSETTS INSTITUTE OF TECHNOLOGY AMERICA’S NATURAL GAS ALLIANCE NPC SURVEY LOW NPC SURVEY MID NPC SURVEY HIGH TRILLION CUBIC FEET 2,000 1,000 0 1999 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 YEAR Estimates: Current Notes: Minerals Management Service (MMS) no longer exists; its functions are now administered by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE). For a detailed discussion of the survey that the NPC used to prepare these “low,” “mid,” and “high” estimates, see the Preface as well as the Resources and Supply chapter. 10 Years Ago EstimatesResource/Supply North American Resource Development Study 9

N.A. Gas Resources Have Potential to Supply the Market for Decades High demand, advanced technology, moderate development cost 10 LOW HIGH(2007 DOLLARS PER MILLION CUBIC FEET) DEMAND DEMAND WELLHEAD DEVELOPMENT COST 8 RANGE OF CUMULATIVE DEMAND 2010–2035 6 MIT MEAN RESOURCE CASE MIT ADVANCED TECHNOLOGY CASE MIT HIGH RESOURCE TECHNOLOGY CASE 4 3 0 1,000 2,000 3,000 TRILLION CUBIC FEETResource/Supply North American Resource Development Study 10

N.A. Oil Supply Has Upside Potential But Risk of Decline High production opportunities enabled by access frameworks 25 NATURAL GAS LIQUIDS OIL SANDS OFFSHORE OIL SHALE ARCTIC ONSHORE CONVENTIONAL TIGHT OIL (INC. EOR) 20MILLION BARRELS PER DAY 15 UNCONVENTIONAL OIL 10 5 } { 0 2010 2035 LIMITED 2035 HIGH POTENTIALResource/Supply North American Resource Development Study 11

Natural Gas and Oil Have a Portfolio of Available Domestic Supply Options •  In the near-term, currently commercial developments: –  Gulf of Mexico, Oil Sands, EOR, tight oil, onshore unconventional gas •  In the medium-term, recognised high-potential areas with currently restricted access: –  Arctic, new offshore regions, plus all the above •  In the long-term, resources which need new technologies and/or new access and regulatory regimes: –  Methane hydrates, shale oil (kerogen), U.S. oil sands, plus all the aboveResource/Supply North American Resource Development Study 12

Policy Choices Can Enable Prudent Development of Supply Options •  Develop appropriate leasing and royalty frameworks •  Establish long-term technology partnerships •  Maintain energy data and analysis capabilities serving government and industry •  Conduct resource assessments covering all prospective areas •  Maintain effective infrastructure permittingResource/Supply North American Resource Development Study 13

Power Sector Most Influences the Outlook for Natural Gas Demand 100 VEHICLE COMMERCIAL TRANSMISSION INDUSTRIAL RESIDENTIAL POWER 80BILLION CUBIC FEET PER DAY 60 40 20 0 2000 2010 AEO AEO MAX. MED. MIN. AEO AEO MAX. MED. MIN. 2010 2011 2010 2011 REFERENCE CASE PROPRIETARY REFERENCE CASE PROPRIETARY 2020 2030 Notes: AEO2010 = EIA’s Annual Energy Outlook (2010); AEO2011 = EIA’s Annual Energy Outlook (2011). Demand North American Resource Development Study 14

North American Natural Gas Can Meet Even the Highest Potential Demand 150 LIQUEFIED NATURAL CANADIAN DEMAND GAS EXPORTS U.S. DEMAND VEHICLE DEMAND SUPPLY (HIGH POTENTIAL) EXPORTS TO MEXICO SUPPLY (LIMITED POTENTIAL)BILLION CUBIC FEET PER DAY 100 50 0 DEMAND SUPPLY LOW DEMAND SUPPLY HIGH DEMAND 2010 2035 Demand North American Resource Development Study 15

Demand Related Recommendations•  Better Reflect Environmental Impacts in Markets and Fuel/ Technology Choices -  Develop and Adopt Methodologies for Full Fuel Cycle Analysis•  Enhance the Efficient Use of Energy -  Support Energy Efficiency Measures for Buildings and Appliances -  Remove Disincentives for Utilities to Deploy Energy Efficiency Measures -  Remove Barriers to Combined Heat and Power•  Enhance the Regulation of Markets -  Allow Utilities to Effectively Manage Natural Gas Price Risk -  Harmonize Interaction between Natural Gas and Power MarketsDemand North American Resource Development Study 16

Natural Gas Has Lower GHG Emissions GHG emissions per MWh 3,000 COAL PLANTPOUNDS OF CO2 EQUIVALENT PER MEGAWATT HOUR (LESS EFFICIENT) COAL PLANT (MORE EFFICIENT) 2,000 GAS-FIRED COMBINED CYCLE 1,000 0 7,000 BTU/KWH HEAT RATE 11,377 BTU/KWH 9,000 BTU/KWH Emissions North American Resource Development Study 17

GHG Emissions Are Rising – But Natural Gas Can Be Figure 4-1. Greenhouse Gas Emissions – 2005 Baseline and Projections Part of the Solution to Help to Lower GHG Emissions 9,500 Reduction Pathways •  Coal displacementMILLION METRIC TONS OF CO2 EQUIVALENT REFERENCE CASE •  Natural gas end-use REFERENCE CASE (AEO2011) technologies •  EPA non-GHG regulations 8,500 •  Price on carbon 2005 BASELINE 7,500 6,500 2005 2010 2020 2030 2040 2050 YEAR Emissions North American Resource Development Study 18

Major Recommendations•  Provide regulatory certainty to the power sector on the EPA non- GHG rules•  Use industry-government partnerships to promote technologies, protocols, and practices to measure, estimate, report, and reduce emissions of methane in all cycles of production and delivery•  As policymakers consider energy and environmental policies, they should consider effective and efficient methods to internalize the cost of carbon impacts –  Policies should be national, economy-wide, market-based, and part of an effective global framework•  Keep option for deep reductions of GHG emissions through lower emitting technologies or Carbon Capture and Sequestration (CCS) R&D that is fuel neutralEmissions North American Resource Development Study 19

Economic Benefits Also Flow From More Domestic Gas & Oil Development •  Direct jobs in the oil & gas industry: 2+ million •  Total direct/indirect jobs from oil & gas industry activity: 9+ million These are high-paying jobs: Average U.S. wage Average U.S. job Gasoline station Petroleum/product - wholesale Petroleum/product - manufacturing NG distribution Pipeline transportation Oil & gas extractionMacroeconomics North American Resource Development Study 20

Other Benefits: Industry Payments of Federal Corporate Income Taxes Figure 5-6. 2008 Federal Taxes Paid by Corpo MANUFACTURING EXCL. PETROLEUM 2008 Federal Taxes Paid by Corporations (Billions of U.S. Dollars) PRODUCTS MANUFACTURING 2008Figure 5-6. income taxes paid by corporations (IRS) ($Billions) Federal FINANCE AND INSURANCE MANUFACTURING EXCL. PETROLEUM $61 PRODUCTS MANUFACTURING OIL AND GAS INDUSTRY FINANCE AND INSURANCE $36 RETAIL TRADE EXCL. GASOLINE STATIONS MANAGEMENT OF COMPANIES $ OIL AND GAS INDUSTRY $30 HOLDING COMPANIES WHOLESALE TRADE EXCL. PETROLEUM $ RETAIL TRADE EXCL. $20 AND PETROLEUM PRODUCTS GASOLINE STATIONS INFORMATION $ MANAGEMENT OF COMPANIES $18 HOLDING COMPANIES PROFESSIONAL, SCIENTIFIC, $6 AND TECHNICAL SERVICES WHOLESALE TRADE EXCL. PETROLEUM $17 TRANSPORTATION AND WAREHOUSING AND PETROLEUM PRODUCTS Other Industries EXCL. PIPELINE TRANSPORTATION $5 INFORMATION $17 MINING EXCL. OIL AND GAS EXTRACTION $5 UTILITIES EXCL. NATURAL GAS DISTRIBUTION $4 PROFESSIONAL, SCIENTIFIC, $6 AND TECHNICAL SERVICES CONSTRUCTION $4 TRANSPORTATION AND WAREHOUSING $5 EXCL. PIPELINE TRANSPORTATION HEALTH CARE AND SOCIAL ASSISTANCE $3 MINING EXCL. OIL AND GAS EXTRACTION $5 ADMINISTRATIVE AND SUPPORT, AND WASTE $3 MANAGEMENT AND REMEDIATION SERVICES Macroeconomics North American Resource Development Study 21UTILITIES EXCL. NATURAL GAS DISTRIBUTION $4 ACCOMMODATION AND FOOD SERVICES $2

Recommendation: Support Intellectual Capital and Skilled Workforce •  The solution will require a greater degree of engagement by the federal government and natural gas and oil companies at the undergraduate and post-graduate level to encourage interest in the industry ⦁  All levels of government need to invest in K-12 science and math education to improve the pipeline of future technical professionals U.S. Petroleum Engineer Enrollment (1972 - 2011) 12 STUDENTS THOUSANDS 8 4 0 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 ACADEMIC YEARMacroeconomics North American Resource Development Study 22

Prudent Development The only way that the U.S. can realize these opportunities is if the resources are developed prudently. •  Prudent Development is essential •  It is the lynchpin for continued, if not expanded access to resources •  It is necessary for public trust and protectionOps/Environment North American Resource Development Study 23

The Geographic Reach of Oil & Gas Development in N. American Wells is Large Total: 4.3 Million Wells Wells per 100 square miles 1-50 51-250 251-500 501-1000 > 1000 Source: IHS / HPDIOps/Environment North American Resource Development Study 24

Game-Changing TechnologyOps/Environment North American Resource Development Study 25

Oil and Gas Development is Regulated From Start to Finish Leasing Land Seismic Assessments Site Preparation Drilling Well Completion Production RestorationOps/Environment North American Resource Development Study 26

Technology Improves Understanding of Fracking Impacts Bottom of deepest aquifers Thousands of feet of separation Top of fractures Fracture Height Determination – MicroseismicOps/Environment North American Resource Development Study 27

Comparing Different Estimates of Environment2-1. Water Consumed to Provide Electricity to 1,000 Average U.S.Energy Sources Footprints Figure Households Annuallyto Provide Electricity to 1,000 Average U.S. Househo of 2-2. Area Disturbed WATER USE ESTIMATES LAND DISTURBANCES 6 BONNEVILLE POWER ADMINISTRATION BONNEVILLE POWER ADMINISTRATION ENVIRONMENTAL COST OF ENERGY ENVIRONMENTAL COST OF ENERGY 5.1 21.2 TENS OF MILLIONS OF GALLONS PER 11,000 MWH 5 20 4.3 ACRES PER 11,000 MWH 4 3.3 3 10 2.1 2 1 2.6 2.5 1.8 0.6 0 0 0.3 0 0 NATURAL GAS COAL WIND NATURAL GAS COAL WIND Water Consumed to Provide Electricity to 1,000 Average U.S. Households Annually Area Disturbed to Provide Electricity to 1,000 Average U.S. Households Annually Ops/Environment North American Resource Development Study 28

Recommendations for Industry and Government Support Prudent Natural Gas and Oil Resource Development and Regulation •  Establish Regional Councils of Excellence •  Adopt Policies for More Effective Regulation •  Commit to Community Engagement •  Develop Consistent Methodologies for Environmental Footprint AnalysisOps/Environment North American Resource Development Study 29

Integrated Findings: Putting it TogetherFindings North American Resource Development Study 30

1. Natural Gas is an Abundant Resource•  N. America’s natural gas resource base is enormous – with potential benefits to the economy, environment and security•  The benefits depend upon access and responsible developmentFindings North American Resource Development Study 31

2. Surprisingly, Oil Resources are Also Abundant•  North America has world-class oil resource basins•  Future access depends upon responsible development practicesFindings North American Resource Development Study 32

3. America Needs Gas and Oil•  Natural gas and oil are indispensable to our economy and standard of living – for the foreseeable future.•  Oil/gas industry: economic benefits to the nation•  Gas can provide significant emissions reductions•  Even so, we must still use these efficiently.Findings North American Resource Development Study 33

4. These Benefits Depend Upon Prudent Development•  Development in different areas require different approaches.•  Everywhere, responsible practices are needed.•  Regulators must evolve their own regulatory requirements.•  These steps are necessary for public trust, protection of health, safety and the environment, and access to resources. http://www.ornl.gov/info/news/pulse/no344/story3.shtmlFindings North American Resource Development Study 34

Key Recommendations: What is NeededRecommendations North American Resource Development Study 35

1. Support Prudent Development •  Establish Regional Councils of Excellence to share effective environmental, health, and safety practices •  Adopt policies for more effective regulation of natural gas and oil reduction and operations •  Commit to and carry out community engagement •  Measure and reduce methane emissions •  By supporting prudent development, provide access to resourcesRecommendations North American Resource Development Study 36

2. Better Reflect Environmental Impacts in Markets & Choices •  Develop and use tools to better analyze and compare the full environmental impacts of fuels and technologies •  Consider options for internalizing the cost of carbon impacts into fuel prices •  Keep open technology options for reducing GHG emissions from gas in the long runRecommendations North American Resource Development Study 37

3. Enhance the Efficient Use of Energy •  Encourage mechanisms to support greater adoption of energy efficiency in buildings and appliances •  Remove barriers to utilities’ promotion of efficiency and combined heat and powerCLAYRecommendations North American Resource Development Study 38

4. Enhance the Regulation of Markets •  Allow utilities to effectively manage their natural gas price risk •  Harmonize interactions between natural gas and power markets •  Provide greater certainty in environmental regulations affecting the power sectorRecommendations North American Resource Development Study 39

5. Support Needed Talent and Know-How •  Support intellectual capital and a skilled workforce: -  Increase the Number of Qualified Natural Gas and Oil ProfessionalsCLAYRecommendations North American Resource Development Study 40

Summary•  We have enormous oil and gas resources – of potential value and importance to the nation•  There’s enough supply to support national objectives – including our economic, environmental and security interests•  The lynchpin to realizing these benefits is prudent development – We have to do this right.•  And our recommendations help us move toward these outcomes.Summary North American Resource Development Study 41

Prudent DevelopmentRealizing the Potential of North America’s Abundant Natural Gas and Oil Resources A Comprehensive Assessment to 2035 with Views through 2050 September 15, 2011 North American Resource Development Study 42

Prudent Development

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