Trisha Curtis, Director of Research, Upstream and Midstream Energy - PowerPoint PPT Presentation

Trisha Curtis, Director of Research, Upstream and Midstream Energy Policy Research Foundation, Inc. (EPRINC) Wyoming Pipeline Authority, Casper Wyoming June 16, 2015

Wyoming Putting unconventional oil production and low oil prices in context 2

About EPRINC • www.eprinc.org • Oil and Gas Journal • Embassy Series • Presentations at Imperial College London, Colombia University, Wyoming Pipeline Authority, EPA, Oxford Institute for Energy Studies • Infrastructure Paper http://eprinc.org/wp- content/uploads/2013/10/EPRINC- PIPELINES-TRAINS-TRUCKS-OCT31.pdf • Department of Energy – Quadrennial Energy Review • Department of Defense • Rin App http://eprinc.org/2014/02/rins- around-rosy-app-available-ios/ 3

When oil prices started to slip Several events taken together along with lowered expectations of Chinese and European economic growth caused oil prices to weaken • 9 mbd plus U.S. production • Some strong non-OPEC production in 2014 • Significant volumes of crude moving from the U.S. to Canada displacing African barrels (Bakken and Eagle Ford) • Libyan crude unexpectedly comes on the market • ISIS is pushing barrels on the market • Draghi spooks markets with negative inflation expectations for Europe in Jackson Hole Sept 2014 • People begin to actually believe the negative data out of China • Saudi’s share of crude into China and Asia eroded by Source: Energy Aspects, Aug 24 th , 2014, WSJ Nov 4 2014 volumes from Iran and Iraq • Rise in dollar (drop in Euro) 4

Past forecasting errors Low oil price forecasts from 1990s through the mid-2000s can be attributed to two major forecasting errors: 1) The extrapolation forward of $20 @ 2020 an ongoing, stable low price environment 2) The expectation that OPEC would currently be producing from 45 mbd to 60 mbd – It currently produces about 30 mbd Source: Presentation by Dr. Maizar Rahman, Indonesian Governor for OPEC, 29 July 2004 5

Major cutbacks in global oil and gas projects Total Development Cost for Upstream Projects (estimate) Projects slowed or delayed Over $100 billion reduction in capital spending across the globe by oil and gas companies. Canada, Australia and Norway account for nearly three quarters of the total delayed capital spending Source: Khalid A. Alsweilem, The Belfer Center for Science and International Affairs Harvard Kennedy School, “A Stable and Efficient Fiscal Framework for Saudi Arabia: The Role of Sovereign Funds in Decoupling Spending from Oil Source: Rystad study, FT, May 18 2015, Christopher Adams, “From Canada to Australia, Revenue and Creating a Permanent Source of Income” energy cuts are laid bare” 6

2015 Announced CAPEX Cuts 2014 Capex 2015 Capex Company (millions) % Change Denbury Resources Inc $1,100.00 $550.00 -50% (millions) Emerald Oil Inc $225.00 $72.50 -68% BP $23,800.00 $20,000.00 -16% Swift Energy $400.00 $100.00 -75% CNOOC $17,200.00 $11,200.00 -35% Marathon Oil $5,500.00 $4,400.00 -20% ConocoPhillips $16,870.00 $11,500.00 -32% Goodrich Petroleum $375.00 $175.00 -53% Occidental Petroleum $8,700.00 $5,800.00 -33% Repsol $4,150.00 $2,700.00 -35% Chevron $40,000.00 $35,000.00 -13% Bellatrix Exploration $400.00 $200.00 -50% Hess $5,600.00 $4,700.00 -16% Cabot Oil and Gas $1,600.00 $900.00 -44% Continental Resources $5,200.00 $2,700.00 -48% Chesapeake Energy $6,700.00 $3,750.00 -44% Murphy Oil $3,430.00 $2,300.00 -33% Chinook Energy $135.00 $45.00 -67% Average CAPEX cut: 36% Concho Resources $2,600.00 $2,000.00 -23% Cimarex Energy $2,200.00 $1,200.00 -45% Sanchez Energy $870.00 $625.00 -28% Concho Resources $3,000.00 $2,000.00 -33% Halcon Resources $1,100.00 $400.00 -64% Diamondback Energy $450.00 $425.00 -6% Rosetta Resources $1,200.00 $750.00 -38% Encana Energy $2,550.00 $2,800.00 10% Oasis Petroleum $1,425.00 $800.00 -44% Gulfport $1,100.00 $660.00 -40% Diamondback Energy $710.00 $425.00 -40% Linn Energy $1,550.00 $730.00 -53% PDC Energy $650.00 $557.00 -14% Lonestar Resources $140.00 $93.00 -34% Bonanza Creek Energy $667.00 $420.00 -37% Magnum Hunter Breitburn Energy Partners $375.00 $200.00 -47% Resources $400.00 $100.00 -75% Stone Energy $875.00 $450.00 -49% Newfield Exploration $2,000.00 $1,200.00 -40% Laredo Energy $1,000.00 $525.00 -48% Nighthawk Energy $22.40 $25.00 12% EOG Resources $8,300.00 $5,000.00 -40% Parex Resources $290.00 $150.00 -48% Shell $35,300.00 $35,000.00 -1% Whiting Petroeum $4,000.00 $2,000.00 -50% Statoil $20,000.00 $18,000.00 -10% ExxonMobil $38,500.00 $34,000.00 -12% Eni $13,900.00 $11,600.00 -17% Cairn India $1,200.00 $500.00 -58% BG Group $9,400.00 $6,500.00 -31% Sasol $4,150.00 $3,735.00 -10% Apache Corp $9,500.00 $3,800.00 -60% Average: 6216.188 4855.25 -36% 7

Drilling more and completing less • Pressuring service costs lower, drilling, but not completing (completion costs roughly 60% of well costs) • Around 900 ND wells are waiting on completion. Similar numbers are likely across the country – Eagle Ford and Permian (a few thousand in total) • Reservoir performance, completion best practices, and cost reduction? Technological and geological advances will likely take a back seat in a low price environment. • Companies forced to make complex economic and geologic decisions • Job losses and ability to quickly turn on production…? This limits the ability to bring production on very quickly. Sort of a swing producer, but not in the OPEC sense. • All dependent on the longevity of low oil prices 8

North American Oil Production 14,000 U.S. Field Production of Crude Oil Canadian Crude Oil Production 12,000 10,000 Thousand Barrels Per Day 8,000 U.S. 9.5 mbd (Mar 6,000 2015) Canada 3.7 mbd (Dec 4,000 2014) 2,000 North America = 13.2 mbd - Source: EIA 9

Permit Activity Wil illi liston Ba Basin in Po Powder Riv River Ba Basin in DJ DJ Bas Basin in (Ni (Niobrara R Reser servoir ir) Uint Uinta Ba Basin in Ut Utica ica Permi mian Anadarko Ba An Basin in Basin Ba in (Mis (M issi sissi ssippian ian, , Granit ite Wash, sh, Mis issi sissi ssippi i Lime ime Ea Eagle le Ford and other st stacked plays) plays) Reservoir ir Source: HPDI, June 8 2015, Past 90 Days 10

U.S. Imports, Production, Canadian Imports 12000 10000 8000 Thousand Barrels per Day U.S. Imports from Canada of Crude Oil Mbbl/d 6000 U.S. Imports of Crude Oil Mbbl/d 4000 U.S. Field Production of Crude Oil Mbbl/d 2000 40% from Canada 0 Source: EIA 11

Shale oil play production 2,000,000 Permian 1.8 mbd 1,800,000 1,600,000 1,400,000 Eagle Ford 1.6 mbd 1,200,000 Barrels Per Day 1,000,000 North Dakota 1.2 mbd 800,000 600,000 Colorado 304,000 b/d 400,000 200,000 Wyoming 239,000 b/d - Eagle Ford North Dakota Permian Basin Wyoming Colorado Source: HPDI June 8 2015, EIA, NDPA 12

U.S. Imports from Abroad Steadily Decline 4500 4000 3500 Thousand Barrels Per Day 3000 Middle 2500 East 2000 1500 Africa 1000 - This crude is 500 now pushed 0 onto the world market Africa Middle East South America Europe North America Eurasia Source: EIA 13

Imports from Saudi Arabia, Canada, and Mexico 3500 3000 2500 Thousand Barrels Per Day 2000 1500 Trade flows are being altered 1000 500 0 Saudi Arabia Canada Mexico Source: EIA 14

EPRINC Production Evaluation…what production could be… 20 Potential 18 outcome with decline 16 in prices 14 Production mbd 12 10 8 6 4 2 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 0-25 25-35 35-42 42-50 50+ Source: EPRINC/Ponderosa 15

What sets the Bakken (and other tight oil) apart? • Globally coveted rocks • 10,000 plus feet so more expensive to drill • Break evens vary • Good and stable crude quality • Distance from markets – cost of transportation • Rail accidents • And other crudes going to those markets (has to go east or west) • Bakken’s complexities make it tricky in short -term in a low oil price environment • The Bakken is the best known shale/tight/unconventional oil play in the world and there is still a lot to learn. Long-term attraction/investment will continue 16

Canadian oil production forecasts - trimmed 2015 Forecast 2014 Forecast Source: CAPP 2014 and 2015, “Crude Oil Forecast. Markets, and Transportation” 17

U.S. exports of crude oil 600 500 Bakken and Gulf Coast crude being sent to eastern 400 Thousand Barrels Per Day Canada pushing out light MENA barrels Jan 2015 - over 300 500,000 b/d to Canada – mostly to 200 eastern Canada (refining capacity 100 800,000 b/d) 0 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 U.S. Exports of Crude Oil Mbbl/d Gulf Coast (PADD 3) Exports of Crude Oil Mbbl/d Source: EIA 18