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) DUG Bakken and Niobrara - Hart Energy - Denver, CO April 2 nd , 2015

Bakken - Diamond in the Rough Appreciating the complexities of Bakken crude in a low oil price environment Photo by Trisha Curtis 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

What sets the Bakken 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 the 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 • This is a boom and bust business. Right now it is busting, but it will boom again ------- • Broader market • Put Bakken in context • Issues 4

North American Oil Production 14000 12000 Canadian Crude Oil Production 10000 Thousand Barrels Per Day U.S. Field Production of Crude 8000 Oil Mbbl/d 6000 U.S. 9.226 mbd (Dec 2014) Canada 3.677 mbd (Oct 4000 2014) 2000 North America = 12.9 mbd 0 Source: EIA 5

When oil prices started to slip Several events taken together along with lowered expectations of Chinese and European economic Saudi’s take… 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 • 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 Source: Energy Aspects, Aug 24 th , 2014, WSJ Nov 4 2014 data out of China 6

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 7 7

CAPP’s Canadian crude oil forecast EPRINC LINE - 2015 likely to be revised slightly lower with additional postponements and cancellations in some future projects Source: CAPP 2014, “Crude Oil Forecast. Markets, and Transportation” 8

US Crude Oil Production and 2015/2016 Possible Projection 12000 Likely trend prior to oil 10000 price drop Possible outcome of 8000 modest growth with 6000 a slight uptick in late 2016 4000 should Dec 2014 (latest prices begin available data) oil 2000 to improve production was just above 9.2 mbd 0 Jan-60 Feb-62 Mar-64 Apr-66 May-68 Jun-70 Jul-72 Aug-74 Sep-76 Oct-78 Nov-80 Dec-82 Jan-85 Feb-87 Mar-89 Apr-91 May-93 Jun-95 Jul-97 Aug-99 Sep-01 Oct-03 Nov-05 Dec-07 Jan-10 Feb-12 Mar-14 Apr-16 Source: EIA, EPRINC 9 9

U.S. exports of crude oil Bakken and Gulf Coast 600 crude being sent to eastern Canada pushing out light 500 MENA barrels further Gulf Coast (PADD 3) Over 500,000 b/d to Exports of Crude Oil depressing prices Thousand Barrels Per Day Mbbl/d 400 Canada in Jan with most to eastern Canadian U.S. Exports of 300 refineries – capacity Crude Oil Mbbl/d about 800,000 b/d 200 -over 100,000 b/d from ND 100 0 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Source: HPDI Aug 2014 10

Source: EIA Thousand Barrels Per Day 1000 1500 2000 2500 3000 3500 500 0 JAN-90 OCT-90 JUL-91 APR-92 JAN-93 U.S. imports of Canadian crude oil OCT-93 JUL-94 APR-95 JAN-96 OCT-96 JUL-97 APR-98 JAN-99 OCT-99 JUL-00 APR-01 JAN-02 OCT-02 JUL-03 Dec 2014 - 3.3 mbd APR-04 JAN-05 OCT-05 JUL-06 APR-07 JAN-08 OCT-08 JUL-09 APR-10 JAN-11 OCT-11 JUL-12 APR-13 JAN-14 OCT-14 11

Cushing stockpiles and WTI 60000 $160 $140 50000 $120 Weekly Cushing 40000 $100 OK Ending Thousand Barrels Stocks excluding SPR of Crude Oil 30000 $80 Thousand Barrels $60 20000 Cushing OK WTI $40 Spot Price FOB 10000 $/bbl $20 0 $- Source: EIA 12

Source: Baker Hughes # of Rigs 1,000 1,500 2,000 2,500 500 0 1/07/2000 6/09/2000 11/10/2000 4/12/2001 9/14/2001 2/15/2002 7/19/2002 Oil 12/20/2002 5/23/2003 10/24/2003 3/26/2004 Gas U.S. rigs and WTI 8/27/2004 1/28/2005 7/01/2005 12/02/2005 Total 5/05/2006 10/06/2006 3/09/2007 8/10/2007 Cushing OK WTI Spot Price FOB $/bbl 1/11/2008 6/13/2008 11/14/2008 4/17/2009 9/18/2009 2/19/2010 7/23/2010 12/22/2010 5/27/2011 10/28/2011 3/30/2012 8/31/2012 2/01/2013 7/03/2013 12/06/2013 5/09/2014 10/10/2014 3/13/2015 $- $20 $40 $60 $80 $100 $120 $140 $160 13

Permian takes the biggest rig dive 600 500 Williston Total 400 Permian Total Eagle Ford Total 300 200 100 0 Source: Baker Hughes 14

Shale oil play production 2,000,000 Permian 1.7 mbd 1,800,000 1,600,000 1,400,000 Eagle Ford 1.5 mbd 1,200,000 Barrels Per Day 1,000,000 North Dakota 800,000 1.2 mbd 600,000 400,000 Colorado 251,000 b/d 200,000 Wyoming 216,000 b/d - Apr-07 Jul-07 Apr-08 Jul-08 Apr-09 Jul-09 Apr-10 Jul-10 Apr-11 Jul-11 Apr-12 Jul-12 Apr-13 Jul-13 Apr-14 Jul-14 Jan-07 Oct-07 Jan-08 Oct-08 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Oct-12 Jan-13 Oct-13 Jan-14 Oct-14 Jan-15 Eagle Ford North Dakota Permian Basin Wyoming Colorado Source: HPDI March 29, 2015, EIA, NDPA 15

ND Crude Forecast 16

Able to sell more bonds and take on more debt Source: Deep Debt Keeps Oil Firms Pumping Producers Have Increased Their Borrowings by 55% Since 2010 By ERIN AILWORTH , RUSSELL GOLD and TIMOTHY PUKO January 6, 2015 17 17

Drilling more and completing less • Recent conference calls suggest completion costs are roughly 60% of well costs • Pressuring service costs lower, drilling, but not completing • Refracing can work, but need to test it and need a good wellbore to start with • ND wells waiting on completion are about 1,000 and likely similar across the country • Reservoir performance, completion best practices, and cost reduction? • Job losses and ability to quickly turn on production…? 18

Technology advances and then oil prices drop Source: Continental Resources March Investor Presentation, Permission granted Source: The American Oil and Gas Reporter, Dec 2011; Continental Resources November 2014 Investor Presentation; Cosima Theloy and Steve Sonnenberg, SPE Paper 168870, presented Denver Aug 2013, “Integrating Geology and Engineering: Implications for Production in the Bakken Play, Williston Basin” 19 19

A little dive into ND data January 2015 – 825 wells WOC Dec – 750 Nov – 775 Oct 2014 – 650 Sept 2014 – 610 2014 avg - 646 2013 avg - 478 Source: NDIC 20 20

Infrastructure and Pricing 21

January 2015 Williston Basin Crude Transportation Williston Basin Production: 1.3 mbd North Dakota: 1,190,511 b/d South Dakota: 4,686 b/d Eastern Montana: 78,000* b/d Tesoro Refinery: 68,000 b/d Truck to Canadian Pipeline: 12,000 b/d Rail: 762,258 b/d Pipeline: 472,939 b/d (up about 40,000 b/d from Aug 2014) Source: NDPA, EPRINC Estimates 22

Source: NDPA Barrels Per Day 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 - Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Williston Basin Rail Estimates Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Low Jul-10 Oct-10 Jan-11 High Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 23

EIA’s New Rail Data Source EIA March 31, 2015: 24

Regional Pricing Disparities Source: Map from AFPM, Flint Hills, EIA, CME Group, and estimates 25

Price Comparison $160.00 $140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 WTI Bakken (North Dakota Light Sweet Flint Hills) WCS (Western Canadian Select) Brent Source: EIA, Flint Hills, CME Group,, Bloomberg 26

Bakken netbacks under pressure Good crude, but not close to major 4/1/15 markets $34 West Coast by Rail $10 - $15 Cushing by Rail $57 Gulf by Rail $57 $10 - $15 $10 - $15 East Coast Cushing Gulf by Pipe by Rail $50 by Pipe $11* $10 - $15 $9* $55 Source: Flint Hills ND Light Sweet, *Estimates from RBN blog Feb 2015 27 27

Refining/Downstream 28