pacwest latin america unconventional gas presentation, supply chain & infrastructure challenges

PacWest Consulting Partners 7941 Katy Freeway, Suite 309

Houston, TX 77024

Supply Chain & Infrastructure Challenges LatAm UCG Presentation

Buenos Aires, Argentina

13 September 2011

Alexander Robart

[email protected]

+1 202 670 8027

LATAM UCG CONFERENCE PRESENTATION

© PacWest 2011 | All rights reserved | 2

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 is a boutique strategy consultancy and market intelligence firm that specializes in unconventional oil & gas

PacWest Business Overview

Provide strategy consulting and advisory services to unconventional O/G operators and suppliers, including:

- Super Majors

- Independents (incl. international)

- Big 4 service companies

- Independent pressure pumpers

- Frac equipment manufacturers

Strength in supply market

- Often work with operator procurement and supply chain groups, helping analyze supply/demand, develop sourcing strategies, building capabilities, etc.

With suppliers, often work at CXO or business lead level

Offer unique market intelligence capabilities

Consulting & Advisory Launched market intelligence business 6

months ago due to lack of information on unconventional supply market

Core product: Shale Supply Market Service

- Analysis of unconventional supply/demand and supplier database

- Emphasis on frac market

- Includes ground-breaking Pressure Pumping Monitoring Service: granular North American fleets/capacity detail by region

Nearing completion of proprietary Frac Database that includes detailed data set of North American fracs – unique in market

- Launching monthly Frac Analysis product

- Frac Database subscriptions available

Market Intelligence Products



Agenda

1) Introduction





6) About PacWest

7) Questions



US Shale Gas Production (bcm)

Since 1990, shale gas production has exploded from zero to close to 90 bcm – it now accounts for nearly one-quarter of US production

Source: EIA, Annual Outlook for 2011



North American Shale Gas Production Additions (Bcfpd)

North American natural gas production is forecast to be driven largely by eight US and Canadian plays

Source: Macquarie Tristone



US Dry Gas Production (Tcf/year)

Source: EIA, Annual Outlook for 2011

By 2030, shale gas is forecast to make up nearly half of US natural gas production

Shale + Tight Gas = 67%



Today’s US Hot Spots

Source: PacWest

There are now dozens of active plays in the US, but demand is straining the existing supply chain and infrastructure in five hot spots

Bakken DJ Basin/Niobrara

Eagle Ford

Permian Basin Granite Wash



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



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US Land Rig Count (Aug 2009 – Aug 2011)

Source: Baker Hughes

On the demand side, US Land rig count has rebounded dramatically since 2009 lows, driving demand of pressure pumping services



The focus on oily plays is evident in the US Land rig count: oil drilling activity finally overtook gas drilling activity in early 2011

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US Land Rig Count – Oil vs. Gas (Aug 2009 – Aug 2011)




The dominance of unconventionals is also evident in the US Land rig count: increases in directional drilling has driven the rig count

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US Land Rig Count – Dir/Hor vs. Vert (Aug 2009 – Aug 2011)




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US Land Average Rig Count Forecast (2011-2014)

Source: PacWest Analysis; Macquarie

Most analysts expect the rig count to increase through 2014

Current: 1,740 rigs (8/19/11)



2011 Supply and Demand Balance – US Land Pressure Pumping

Source: CIBC World Markets; Macquarie; PacWest analysis

The US Land pressure pumping market is significantly under-supplied

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Supply Demand

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Backlog New Completions

8,534,250 HHP

735,890 HHP

11,935,890 HHP

11,200,000 HHP

The under-supply is not expected to be relieved until late 2012 or early 2013

3,401,640 HHP

GAP PRESENTS CHALLENGE



Agenda

1) About PacWest





6) About PacWest

7) Questions



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?



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Operator 3rd Party Spend by Category (3-yr)

Source: PacWest Analysis; Macquarie

A NA unconventional operator forecasts that pressure pumping, rigs, and water will drive nearly 60% of 3-year 3rd party costs across 3 plays

Stimulation/Completion = 39%

Drilling Rigs = 11% Water Treatment/Disposal = 9%

OCTG = 8% D&C Fluids= 4%

Contract Labor = 4%



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



Pressure pumping demands significant quantities of consumables, which complicate sourcing and logistics

Pressure Pumping Consumables

Average Eagle Ford frac requires 3-5 million gallons (80,000-120,000 bbls) of water

Water must be sourced, potentially pre-treated, and transported to frac site via trucks or pipes

10-40% of water flows back over 30-day period – what do you do with flowback?

- Treat it?

- Dispose it?

Water

Average Bakken frac requires 1.5 million lbs of sand – equivalent to 15 rail cars

North American supply is already extremely tight, though many new projects coming online over next 18 months

Logistics costs 50+% of sand costs within NA

What are economic sources of proppant in Argentina?

Proppant

Huge volumes of chemicals used during completion

Chemicals blends used are highly specific to a particular formation – key elements of innovation

There are already shortages of some key chemical inputs

Logistics of getting chemicals to site challenging in areas with limited infrastructure

Chemicals

Source: PacWest analysis



Agenda

1) About PacWest





6) About PacWest

7) Questions



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



A new study by the Baker Institute forecasts shale gas production across key regions through 2040

Global Shale Resource Estimates & Production Forecasts

Source: EIA, World Shale Gas Resources Report; Baker Institute, Shale Gas and US National Security

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Global Shale Resource Estimates (bcf) Gas Production Forecasts (tcf)



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However, more than just technically recoverable resources are required to successfully produce unconventionals; many critical risk factors

Non-Technical Risks Factors

Source: PacWest Analysis

Demand

Supply Chain

Domestic E&P Industry

Markets

Regulatory Frameworks

Infrastructure

Development Constraints

The level of natural gas demand within the country and neighboring countries that can serve as consumers

Water, population densities, political/social acceptance, etc.

Quality of existing supply chain, number of rigs currently in-country, ease of entry for new players, etc.

Number of existing domestic E&P firms, level of unconventional experience, ease of entry, etc.

Regulatory structure, midstream/downstream demand dynamics, etc.

Fragmentation, tax policies, government incentives for unconventional development, etc.

Quality of existing midstream, ease of developing new infrastructure, etc.



Besides Argentina, China and Poland have made the most progress in exploring their shale acreage

Shale Status: China & Poland

Multiple US majors active in China under JVs

Early exploration work progressing in target basins

Promising frac equipment JV relationships set up to supply manufacture frac pumps in China (Weir SPM and Shengli Highland)

Strong incentives to encourage production

Proven capability and commitment to building infrastructure

China

Multiple wells drilled by key operators (i.e. PGNiG) with gas shows from multiple wells

SLB recently completed 13-stage frac for 3Legs Resources

Exploration programs on-going with many more wells to drill under concession minimum requirements

Capital beginning to flow to develop domestic supply chain

Logistics/ transportation issues already emerging

Poland



Australia has made significant progress on CBM, while India has a long way to go on shale

Shale Status: Australia & India

Strong geology, economic incentives, regulatory framework

Making significant progress towards significant CBM production

Numerous domestic and international operators participating

Significant supply chain bottlenecks emerging across multiple products/ services – need for greater supply chain support

Infrastructure availability inland poses challenges

Shale exploration still early stage

Water sourcing for fracing will present challenges

Australia

Geology still uncertain – SLB fraced wells for ONGC in West Bengal (Damodar Valley Basin) and Assam

Economic incentives and regulatory framework still TBD

DGH has delayed shale concession round several times – currently targeted for 2012 Q1

Resources relatively small, but growing energy demand and limited domestic resources mean they are important

Major challenges developing infrastructure in the country do not bode well for pace of development

Will likely be 3-5 years behind China

India



There have been some recent roadblocks to shale production in select countries around the world

Global Shale Resources

Source: EIA, World Shale Gas Resources Report

■ Canada: Quebec put temporary moratorium in place

■ France: Recently put a shale moratorium in place, putting exploration activity in the highly promising Paris Basin on hold for now

■ UK: Has seen protests, then embrace by government; Cuadrilla put its exploration activities on hold after minor seismic activities during drilling

■ Sweden: Has seen protests to Shell’s exploration activity

■ India: Licensing round delayed until 2012 Q1

■ South Africa: Temporary moratorium in place pending assessment of environmental impact report – government recently requested a new version of the report, delaying release another 6 months

■ EU: Considering stricter shale guidelines to the protests of Poland



One thing to keep in mind is how supply chain needs differ for exploration versus development phases

Exploration vs. Development Phase

Data collection exercise

Goal: collect enough data to prove that hydrocarbons are present

Priorities: speed, logistical simplicity

Willingness-to-pay: relatively high

Staffing: in-country team small

Exploration Phase

Supply chain development and mgmt

Goal: build a long-term supply base that will help you reduce costs and optimize production, while minimizing risks

Priorities: cost management, diversification

Willingness-to-pay: low to moderate

Staffing: build local resources

Development Phase

Bundling strategies are common to simplify logistics, mgmt, admin

Work with local equipment providers (i.e. rigs) if possible for speed

Big 4 and majors often best positioned

More likely to distribute work between majors and local players

Willing to invest time/effort in building local supply base

Fwd-looking sourcing strategies

Implications



Agenda

1) About PacWest





6) About PacWest

7) Questions



The US Bakken play has boomed over last two years, placing significant strains on existing infrastructure and supply chain

The Bakken Formation

Source: Continental Resources

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

US Analogue: Bakken



Since late-2009, the rig count has increased 2.5-times with counts forecast at 200+ rigs beyond this year

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Rig Count – Dir/Hor vs. Vertical Average Rig Count Forecast Land Rigs Land Rigs

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Current: 184 rigs (8/19/11)

Source: PacWest Analysis; Macquarie; Baker Hughes



Overwhelming demand in the Bakken is expected to lead to a significant under-supply of pressure pumping capacity for 2011

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Sensitivity Analysis of 2011 Bakken Pressure Pumping Capacity Utilization

Sources: CIBC World Markets; Macquarie; PacWest analysis

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The Bakken will be 61% under-supplied in 2011, conservatively assuming 20 stages/well



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Sensitivity Analysis of 2012 Bakken Pressure Pumping Capacity Utilization

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Source: CIBC World Markets; Macquarie; PacWest analysis

Demand will continue to outpace supply for pressure pumping capacity into 2012 in the Bakken

Note: Sensitivity analysis assumes an average of 20 frac stages / well in 2012, a conservative estimate



Staffing experienced crews is a critical challenge faced by pressure pumping service providers

■ 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

The Quality vs. Quantity Dilemma



Supply chain constraints are holding back the deployment of new equipment and the ability to consistently supply pumping services

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

Bakken Supply Chain Constraints



Bakken pressure pumping supply has been unable to keep pace with demand so well completion backlogs are growing

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Bakken Well Count (May 2011)



Operator D&C performance varies, in some cases depending on contracting practices

Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis

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Note: Well backlog is best estimate based on data from Montana and North Dakota oil/gas regulators; rig count is from April 2011



Agenda

1) Introduction





6) About PacWest

7) Questions



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 unique combination of strategic and analytical capabilities with strong market intelligence offer a unique service

PacWest Market Intelligence Capabilities

Key differentiator: turning market data and intelligence into meaningful and actionable information

Transform volumes of disparate market data, industry insider activity, and field-level intelligence and expert input into strategic and actionable recommendations for decision-makers

Aggregate, organize and distill a wide range of data and intelligence to provide information to our clients that is comprehensive, focused, and strategic

Analyze this information to assess its strategic implications and provide a clear path of action for each stakeholder

PacWest Difference

Subscription-based market intelligence product with quarterly releases

Includes multiple components:

- Unconventional Supplier Database: 100+ suppliers

- Supplier Market Insights report

- Monthly Frac Analysis report

- Pressure Pumping Monitoring report

- D&C Cost Escalation report

All components are also available as stand-alone products

Frac Database high value frac data set – first product of its kind available on market

Shale Supply Market Service



Agenda

1) Introduction





6) About PacWest

7) Questions

pacwest latin america unconventional gas presentation, supply chain & infrastructure challenges

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