The document discusses the transformative impact of unconventional oil and gas on the U.S. energy market, highlighting the country's increasing energy self-sufficiency while still being part of a global market. It addresses the rapid growth of shale gas and oil production, the associated regulatory and environmental challenges, and the need for revised policies to balance fossil fuel development with climate objectives. Additionally, it points out potential implications for global trade flows and energy security in light of new supply sources and market dynamics.

1. Unconventional Oil & Gas: Reshaping Energy
Markets
Frank A. Verrastro
Senior Vice President & CSIS Energy and James R. Schlesinger Chair
for Energy & Geopolitics
March 2013

2. Landscape continues to change …US perspective
- US is 80% Energy Self-Sufficient But Still Part of a
Global Market
- Changing Demand Growth Centers
- New Emerging Players but Old Institutions
- Transformational Impact of Unconventionals
- Difficult to Isolate Oil, Liquids, and Natural Gas
Issues
- 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 www.csis.org |

3. Unconventional Natural Gas
Resources
www.csis.org |

4. New technologies and practices drive production from
shale deposits.
Source: USGS

5. Hydraulic Fracturing
• Multiple protective
barriers of steel pipe
and cement protect
aquifers, which are
located within 700 feet
of the surface
• Fracturing occurs more
than a mile below, and
separated by
thousands of feet of
impenetrable
rock, potential sources
of water
www.csis.org |

6. Unconventional Gas
U.S. Shale Gas Resources

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

8. Unconventional Gas
Projected Contribution of Shale Gas to Total US Supply
U.S. dry gas production, trillion cubic feet per year
History 2010 Projections
23% Shale gas
21%
Non-associated onshore
9% Non-associated offshore
26% Tight gas
9% Coalbed methane
2% 10% Associated with oil
Source: EIA, Annual Energy Outlook 2013 Early Release

9. Unconventional Gas
Natural Gas Resources Have Potential to Supply the Market for Decades
High demand, advanced technology, moderate
development cost

10. Unconventional Gas
Projections for natural gas prices have declined as
understanding of resource base expands
natural gas spot price (Henry Hub) per million BTU
12
History Projections
10
Updated AEO2009 AEO2010
8
AEO2011
(2011$)
6
AEO2013
4
2
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Sources: EIA, Annual Energy Outlook 2011; EIA, Annual Energy Outlook 2010; and EIA, An Updated Annual Energy Outlook 2009 Reference Case

11. Unconventional Gas
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 2012, June 25, 2012

12. Unconventional Gas
Potential Gas Pathways
Non-Associated gas Gas to Power/ Residential &
Gas Pipeline
Commercial
Associated gas
LNG for Export
Liquefaction
LNG for Transport
Gas to Chemicals
Chemical
Reaction
Gas To Liquids (GTL)
Syngas
Refined
Crude Oil
Oil Products
Source: Royal Dutch Shell

13. Unconventional Gas
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
www.csis.org |

14. Unconventional Gas
Realizing the full promise of shale resources is not a
certainty and US domestic policy is important
Technical/Economic Challenges Environmental/Regulatory/Societal
Challenges
• All shales are not alike; application •Well design and management of
of drilling/reservoir fracturing surface chemicals/materials are the
technology & operational experience best barriers to protecting water
matters aquifers
• Steep decline rates require ongoing •Disclosure of components of fracking
investment and drilling; and
repeated fracturing • Scale of water use, treatment &
disposal are challenging
• Cost escalation and low commodity
prices limit prospects •Community Issues –
infrastructure, land use, population
• Infrastructure build-out and refinery density, noise, haze, health issues, road
rationalization congestion and repair need to be
addressed
•Seismicity – associated with
wastewater injection
•Regulation and enforcement are
essential

15. Tight/Unconventional Oil
Resources
www.csis.org |

16. Unconventional Oil
Resource Assessments Often Reflect One’s Point of View
- Resource Enthusiasts
- Proven Reserve Skeptics
- Production Pessimists
- Capacity Scoffers
- Demand Worry Warts/Cassandras
- National Security Alarmists
- Resource Nationalists
- Economic Idealists
- Technology Bulls
- Climate Bears
www.csis.org |

17. Unconventional Oil
NPC Study Identifies Large Oil Potential as Well

18. “Change” is now the Constant :
US technologic, economic, and policy environment continues to shift
- Rapidly rising production profiles from the Williston, Permian
and Western Gulf basins
- Logistics, opportunities and challenges for oil, liquids, and
natural gas
- Moving the bottleneck: timelines and sequencing – upstream,
midstream and downstream investment & choices
- 40 years of policies based on resource scarcity and rising US
demand need to be revisited
- Policy Dilemma: Reconciling fossil fuel abundance with climate
objectives
- Federal, state & local/stakeholder issues
www.csis.org |

19. Key Onshore Crude Production Basins
www.csis.org | 19
Source: EIA STEO Supplement

20. Unconventional Oil
Tight Oil Opportunities Span the Lower 48
Source: Wood Mackenzie, April 3, 2012

21. Unconventional Oil
Oil, Gas & NGL Price Comparison
30 30
25 25
$/MMBtu Equivalent
20 20
15 15
10 10
5 5
0 0
WTI $/MMBtu HH Gas $/MMBtu
MB NGL Ave. $/MMBtu
www.csis.org |

22. Unconventional Oil
Reorienting the US Rig Count

23. Unconventional Oil
U.S. Active Rig Locations: Major Resource Plays Dominate
Williston Basin
Bakken Shale (Oil Play)
Pinedale/Jonah Niobrara Shale Play
Tight Gas (Oil Play)
Uinta – Piceance Marcellus
Woodford Shale Gas Play
Shale Gas Play
Granite
Wash, Cleveland,
Miss. Fayetteville
Shale Gas Play
Barnett Shale Gas
Play
Haynesville
Permian Basin-Oil Shale Gas Play U.S. Active Rigs
Targets
1400
1200
1000
800
Eagle Ford Shale
Play
600
400
200
0
Ver Dir Hor
Source RigData and BENTEK: Lower 48 States, March 9, 2012

25. Unconventional Oil
Historical U.S. Crude Oil Production
12000
Federal
Alaska Lower 48
Offshore
10000
U.S. Onshore
Crude Oil
Thousands of barrels/day
8000 Production on the
Rise
6000
4000
2000
0
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
www.csis.org |
Source: EIA

26. Forecast through 2016 shows
Continued Growth
10,000
9,000
8,000
7,000
„000s b/d
6,000
5,000
4,000
3,000 1988
2,000
1,000
0 1955
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
1900-2007 2008-2010 2011-2016
www.csis.org |
Source: EIA, Excludes NGLs and Other Liquids

27. Tight oil production for selected plays
approaching 2.0 million b/d

28. Can the Bakken Story be Replicated (Again and Again)?
000 b/d Surging U.S. Shale Liquid Production (oil and NGL)
2500
Woodford
2000
Niobrara
Marcellus
1500
Lower Monterey
Granite Wash
1000
Eagle Ford
Barnett
500
Bakken
0 Avalon/ Leonard
2005 2010 2015 2020
Source: Energy Security Analysis, Inc. (ESAI) April 3, 2012

29. Unconventional Oil
LARGE UNCONVENTIONAL OIL RESOURCES

30. Unconventional Oil
PAD Districts and Refinery Locations
www.csis.org |
Source: EPRINC, Info. From CME Group and Purvin and Gertz Study

31. New Pipeline Projects Delivering to Cushing (2010-2012): 815,000 bbl/d
New Pipeline Projects Delivering to Cushing (2013-2014): 1,225,000 bbl/d
New Pipeline Projects from Cushing Delivering to Gulf Coast (2013-2014): 1,400,000 bbl/d
Canada
Bakken
Niobrara
Anadarko
Seaway
Permian
Eagle Ford
Rail
Source: EIA, Petroleum Project
Barge
Tracker, Bentek, RFG, CSIS analysis
Not All Projects Shown Dock Terminal
Note: 2011 Average to 2016 Average (MB/d)

32. Unconventional Oil
Where Does All this Light Crude Go?? What Can PADD III
Absorb? What Gets Displaced/Changed?
1000 700 600
900
600 500
800
700 500
400
600 400
MB/D
MB/D
MB/D
500 300
400 300
300 200
200
200 100
100
100
0 0 0
HOUSTON, TX PORT ARTHUR, TX ST. JAMES, LA
Light (32⁰+)
Intermediate (28-32⁰)
Heavy (28⁰-)
www.csis.org |
Note: 2011 Average Imports (Jan-Dec 2011)

33. US Production Already Backing Out Imports
40,000
Bakken production
35,000 Eagle Ford Production
Angola Crude and Products
30,000 Nigeria Crude and Products
Algeria Crude and Products
25,000
Thousand Barrels
20,000
15,000
10,000
5,000
0
Jun-2010
Oct-2010
Jan-2011
Mar-2011
Jun-2011
Oct-2011
Jan-2012
Mar-2012
Jun-2012
Oct-2012
Apr-2010
May-2010
Aug-2010
Apr-2011
May-2011
Aug-2011
Apr-2012
May-2012
Aug-2012
Jul-2010
Sep-2010
Nov-2010
Feb-2011
Jul-2011
Sep-2011
Nov-2011
Feb-2012
Jul-2012
Sep-2012
Dec-2010
Dec-2011
Source: EIA, Texas RRC, North Dakota DMR *Avg monthly production based on annual figures

34. Continued liquids growth and reduced demand means lower imports
US Liquid fuels supply, 1970-2040
Million b/d
www.csis.org |
Source: EIA Annual Energy Outlook 2013 Early Release

35. Potential Implications & “Unconventional” Wisdom
• New supply growth (quality and volume) will shape the market; crude
slate for US refineries will get lighter; growth in liquid supplies will
back out (selectively) medium and heavier crudes
• Higher refinery utilization in will encourage refined product exports
• New rail and pipe infrastructure will move domestic crudes east and
west as well as south
• Economics/price spreads (and policies?) will determine how refineries
make crude choices
• Micro decisions may drive Macro picture
• There will be surprises, unintended consequences and sub-optimal
outcomes
• Regulatory Policy in time of change needs to be flexible, adaptive.
responsible, effective and collaborative

36. Global Implications
• Some “obvious near term” winners and losers,
• But … global impacts are more nuanced, less clear and time
sensitive
• Strength of US refining sector could swamp new
construction in Latin America
• Expansion of global shales could increase volume, reduce
prices & improve environment
• New supply sources could impact global trade flows, but for
how long?

37. Trade Balances May See Significant Change Due to Resources and Demand Growth
– Creating A New Energy Security Paradigm?

38. Call on OPEC and Spare Capacity
Source: BP Energy Outlook 2030

39. What Could Change the Storyline?
• Resource Over/Under Performance?
• Technology Advancements, including Disruptive Technologies in
Competing Areas
• Commerciality/Economics/Energy Prices & Costs
• Investment Climate for Participants
• Timing/Expense of Infrastructure Buildout
• Public Sentiment – License to Operate (upstream & downstream)
• Geopolitical and/or Catastrophic Events/Accidents
• Policy & Regulations
• Climate Change & the Transformation to Low Carbon Energy
www.csis.org |

40. Climate Change
www.csis.org |

41. Climate Change Risks
Warming
Food Falling crop yields in developing regions first, then developed regions later
Mountain glaciers
Many more areas suffer Sea level rise
Water disappear; Decreased
from low water availability threatens major cities
water in some areas
Ecosystems
Extensive damage Rising numbers of species extinctions
to coral reefs
Extreme
Rising intensity of storms, wildfires, droughts, floods, heatwaves
Weather
Risk of Irreversible Rising risk of dangerous positive feedbacks,
or Abrupt Changes Rapid SLR and collapse of Atlantic conveyor
Today 450 550 650 750 850 950
ppm ppm ppm ppm ppm ppm
E3G, Adapted from Stern 2006

42. Climate Change as Threat Multiplier
42
42
Water Scarcity Demography Crop Decline Hunger Coastal Risks

43. GHG Reductions Required to Meet 2 Degree Goal
45
Gt
OECD 28%
Current Policies
40 Non-OECD Scenario 7 Gt
71%
35
New Policies 33%
Scenario
30 15 Gt
65%
25
450 Scenario
20
1990 2000 2010 2020 2030 2035
43

44. Technology Each option would save one gigatonne of CO2 per year
Build 130 new (1GW) nuclear power plants in lieu of
Nuclear new coal-fired power plants without CO2 capture and
storage
Build 320 new zero-emission 500MW coal-fired power
Coal-Fired
Generation plants in lieu of coal-fired plants without CO2 capture
and storage (none exist now)
Convert 100 million acres of barren area to new forest
CO2 Capture
In Forestry (equiv of Spain, 2.5 times the size of Washington
state)
Improved Double fuel efficiency; Deploy 290 million new cars at
Efficiency 40mpg rather than 20mpg
www.csis.org |
Source: DOE Climate Change Technology Program,
http://www.climatetechnology.gov/stratplan/final/index.htm 44

45. Balancing Costs of Impacts, Mitigation, and Adaptation
There Will Be Costs
The Questions: How We Choose to
All Pay, Who Will Pay, How will the $
Mitigation be spent?
Choices Must Be Made in Context
of Balancing “E3” Goals of
• Energy Security
• Economy
• Environment
What is
No Action All Adaptation Optimal?
less Cost of Adaptation more
A schematic overview of inter-relationships between adaptation,
mitigation and impacts.
Source: Holdridge, M.L. Parry
www.csis.org |

46. POLICY MODEL
Economic Objectives
Reliable and Secure
Affordable/Accessible
Supports Economic Natural Oil
Growth & Gas Defensible
Employment
Nuclear Coal
Energy
Efficiency
Carbon
Environmentally Capture and
Benign Storage Renewable
Energy
Security &
Environmental Foreign
Objectives Promotes/Supports Policy
Low/no Sustainable Objectives
emissions Environment

47. Strategies to Enhance Oil U.S. Security
Mmb/d
25
20 Moderate
Liquid Fuels Demand demand
15
Imports
10 Diversify
supplies
Maintain/
5 expand
domestic
Domestic Oil Supply oil output
0
2009 2012 2015 2018 2021 2024 2027 2030
Source: EIA Reference Case / NPC Global Oil and Gas study survey.

48. …Becoming a Reality
Energy Security Leadership Council, “The New American
Oil Boom, Implications for Energy Security,” 2012

49. What Could a 21st Century Energy Network Look Like?

51. The “NEW” Fundamentals FUTURE EXPECTATIONS
Supply Weather
Demand
Geopolitics
Inventory Levels
Market Price
Demand Growth/
Capacity Utilization Macroeconomics
Refining Supply Growth
Configuration and
Product slates
Investment $
Crude Quality
Market Momentum Infrastructure Availability
Financial Markets
Interest Rates, Foreign Exchange,
Asset Markets