PacWest Latin America Unconventional Gas Presentation, Supply Chain & Infrastructure Challenges

Supply Chain & Infrastructure Challenges
LatAm UCG Presentation

Buenos Aires, Argentina
13 September 2011

Alexander Robart
arobart@pacwestcp.com
+1 202 670 8027
PacWest Consulting Partners
7941 Katy Freeway, Suite 309
Houston, TX 77024

LATAM UCG CONFERENCE PRESENTATION

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 2011 | All rights reserved | 2


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

Consulting & Advisory Market Intelligence Products
 Provide strategy consulting and advisory  Launched market intelligence business 6
services to unconventional O/G operators months ago due to lack of information on
and suppliers, including: unconventional supply market
- Super Majors  Core product: Shale Supply Market Service
- Independents (incl. international) - Analysis of unconventional
- Big 4 service companies supply/demand and supplier database
- Independent pressure pumpers - Emphasis on frac market
- Frac equipment manufacturers - Includes ground-breaking Pressure
Pumping Monitoring Service: granular
 Strength in supply market North American fleets/capacity detail by
- Often work with operator procurement region
and supply chain groups, helping analyze  Nearing completion of proprietary Frac
supply/demand, develop sourcing Database that includes detailed data set of
strategies, building capabilities, etc. North American fracs – unique in market
 With suppliers, often work at CXO or - Launching monthly Frac Analysis product
business lead level
- Frac Database subscriptions available
 Offer unique market intelligence capabilities


Agenda

1) Introduction





6) About PacWest

7) Questions



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

Source: EIA, Annual Outlook for 2011


North American natural gas production is forecast to be driven largely
by eight US and Canadian plays
North American Shale Gas Production Additions (Bcfpd)

Source: Macquarie Tristone


By 2030, shale gas is forecast to make up nearly half of US natural gas
production
US Dry Gas Production (Tcf/year)

Shale + Tight Gas = 67%
Source: EIA, Annual Outlook for 2011


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

DJ Basin/Niobrara
Bakken

Granite Wash
Permian Basin

Eagle Ford
Source: PacWest


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



On the demand side, US Land rig count has rebounded dramatically
since 2009 lows, driving demand of pressure pumping services
US Land Rig Count (Aug 2009 – Aug 2011)

2,500

2,000

1,500
Land Rigs

1,000

500

0
Nov-09

Nov-10
Sep-09

Feb-10

May-10

Sep-10

Feb-11
Aug-09

Oct-09

Dec-09
Jan-10

Mar-10
Apr-10

Jun-10
Jul-10
Aug-10

Oct-10

Dec-10
Jan-11

Mar-11
Apr-11
May-11
Jun-11
Jul-11
Source: Baker Hughes


The focus on oily plays is evident in the US Land rig count: oil drilling
activity finally overtook gas drilling activity in early 2011
US Land Rig Count – Oil vs. Gas (Aug 2009 – Aug 2011)

100%
90% Oil
80% Gas
Percentage of Land Rigs

70%
60%
50%
40%
30%
20%
10%
0%
Sep-09

Nov-09

Feb-10

Sep-10

Nov-10

Feb-11
Oct-09

Dec-09

Mar-10
Apr-10

Jun-10
Jul-10

Dec-10

Apr-11

Jun-11
Jul-11
Jan-10

May-10

Oct-10

Mar-11
Jan-11

May-11
Aug-09

Aug-10



The dominance of unconventionals is also evident in the US Land rig
count: increases in directional drilling has driven the rig count
US Land Rig Count – Dir/Hor vs. Vert (Aug 2009 – Aug 2011)

2,500
Directional/Horizontal
2,000 Vertical

1,500
Land Rigs

1,000

500

0
Sep-09

Nov-09

Feb-10

Sep-10

Nov-10

Feb-11
Oct-09

Dec-09

Mar-10
Apr-10

Jun-10
Jul-10

Oct-10

Dec-10

Mar-11
Apr-11

Jun-11
Jul-11
Jan-10

May-10

Jan-11

May-11
Aug-09

Aug-10



Most analysts expect the rig count to increase through 2014
US Land Average Rig Count Forecast (2011-2014)

2,500
Current: 1,740 rigs (8/19/11)
2,020 2,089
2,000
1,950
1,709
1,500
Land Rigs

1,000

500

0
2011 2012 2013 2014

Source: PacWest Analysis; Macquarie


The US Land pressure pumping market is significantly under-supplied
2011 Supply and Demand Balance – US Land Pressure Pumping

200%
180%
Backlog New Completions
Pressure Pumping Capacity Utilization

160%
11,935,890 HHP
140%
9% 735,890 HHP
120% 3,401,640 HHP
8,534,250 HHP
100%
80% GAP PRESENTS
131% 11,200,000 HHP
60% CHALLENGE
100%
40%
20%
0%
Supply Demand
The under-supply is not expected to be relieved until late 2012 or
early 2013
Source: CIBC World Markets; Macquarie; PacWest analysis


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?


A NA unconventional operator forecasts that pressure pumping, rigs,
and water will drive nearly 60% of 3-year 3rd party costs across 3 plays
Operator 3rd Party Spend by Category (3-yr)
Stimulation/Completion = 39%
0
0 39%

0
% of Total 3-Yr Spend

0
0
Drilling Rigs = 11%
0 Water Treatment/Disposal = 9%
0 11%
OCTG = 8%
D&C Fluids= 4%
0 9% 8% Contract Labor = 4%
4% 4% 4% 3%
0 3% 3% 2% 2% 1% 1%
1% 1% 1% 1% 1% 1% 1% 0% 0% 0%
0

Source: PacWest Analysis; Macquarie


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

Water Proppant Chemicals
 Average Eagle Ford frac  Average Bakken frac  Huge volumes of
requires 3-5 million requires 1.5 million lbs chemicals used during
gallons (80,000- of sand – equivalent to completion
120,000 bbls) of water 15 rail cars  Chemicals blends used
 Water must be  North American supply are highly specific to a
sourced, potentially is already extremely particular formation –
pre-treated, and tight, though many key elements of
transported to frac site new projects coming innovation
via trucks or pipes online over next 18  There are already
 10-40% of water flows months shortages of some key
back over 30-day  Logistics costs 50+% of chemical inputs
period – what do you sand costs within NA  Logistics of getting
do with flowback?  What are economic chemicals to site
- Treat it? sources of proppant in challenging in areas
- Dispose it? Argentina? with limited
Source: PacWest analysis infrastructure


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

India 63 70

France 180 India
60
Poland 187 France
Brazil 226
50
Poland
Algeria 231 Brazil
Libya 290 40 Algeria
Canada 388 Libya
30
S Africa 485 Canada
Mexico 681 20 Mexico
Agentina 774 Argentina
USA 862 10 USA
China 1,275 China
0
- 200 400 600 800 1,000 1,200 1,400 2010 2015 2020 2025 2030 2035 2040

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


However, more than just technically recoverable resources are required
to successfully produce unconventionals; many critical risk factors
Non-Technical Risks Factors

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

Supply Chain  Quality of existing supply chain, number of rigs currently
in-country, ease of entry for new players, etc.
Domestic E&P  Number of existing domestic E&P firms, level of
Industry unconventional experience, ease of entry, etc.
Indirect Direct Indirect Indirect

Markets  Regulatory structure, midstream/downstream demand
dynamics, etc.
Regulatory  Fragmentation, tax policies, government incentives for
Frameworks unconventional development, etc.

Infrastructure  Quality of existing midstream, ease of developing new
infrastructure, etc.
Development  Water, population densities, political/social acceptance,
Constraints etc.

Source: PacWest Analysis


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

China Poland
 Multiple US majors active in China  Multiple wells drilled by key operators
under JVs (i.e. PGNiG) with gas shows from
 Early exploration work progressing in multiple wells
target basins  SLB recently completed 13-stage frac for
 Promising frac equipment JV 3Legs Resources
relationships set up to supply  Exploration programs on-going with
manufacture frac pumps in China (Weir many more wells to drill under
SPM and Shengli Highland) concession minimum requirements
 Strong incentives to encourage  Capital beginning to flow to develop
production domestic supply chain
 Proven capability and commitment to  Logistics/ transportation issues already
building infrastructure emerging



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

Australia India
 Strong geology, economic incentives,  Geology still uncertain – SLB fraced
regulatory framework wells for ONGC in West Bengal
 Making significant progress towards (Damodar Valley Basin) and Assam
significant CBM production  Economic incentives and regulatory
 Numerous domestic and international framework still TBD
operators participating  DGH has delayed shale concession
 Significant supply chain bottlenecks round several times – currently targeted
emerging across multiple products/ for 2012 Q1
services – need for greater supply chain  Resources relatively small, but growing
support energy demand and limited domestic
 Infrastructure availability inland poses resources mean they are important
challenges  Major challenges developing
 Shale exploration still early stage infrastructure in the country do not
bode well for pace of development
 Water sourcing for fracing will present
challenges  Will likely be 3-5 years behind China


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

■ Sweden: Has seen protests to
■ Canada: Quebec put temporary Shell’s exploration activity
moratorium in place
■ UK: Has seen protests, then
embrace by government;
Cuadrilla put its exploration
activities on hold after minor
■ EU: Considering stricter seismic activities during drilling
shale guidelines to the
protests of Poland

■ France: Recently put a shale
■ India: Licensing round
moratorium in place, putting
delayed until 2012 Q1
exploration activity in the highly
promising Paris Basin on hold
for now ■ South Africa: Temporary
moratorium in place pending
assessment of environmental
impact report – government
recently requested a new
version of the report, delaying
Source: EIA, World Shale Gas Resources Report release another 6 months


One thing to keep in mind is how supply chain needs differ for
exploration versus development phases
Exploration vs. Development Phase

Exploration Phase Development Phase
 Data collection exercise  Supply chain development and mgmt
 Goal: collect enough data to prove that  Goal: build a long-term supply base that
hydrocarbons are present will help you reduce costs and optimize
 Priorities: speed, logistical simplicity production, while minimizing risks
 Willingness-to-pay: relatively high  Priorities: cost management,
diversification
 Staffing: in-country team small
 Willingness-to-pay: low to moderate
 Staffing: build local resources
Implications
 Bundling strategies are common to  More likely to distribute work between
simplify logistics, mgmt, admin majors and local players
 Work with local equipment providers  Willing to invest time/effort in building
(i.e. rigs) if possible for speed local supply base
 Big 4 and majors often best positioned  Fwd-looking sourcing strategies


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
US Analogue: Bakken
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
Source: Continental Resources


Since late-2009, the rig count has increased 2.5-times with counts
forecast at 200+ rigs beyond this year
Bakken Rig Count & Forecast
Rig Count – Dir/Hor vs. Vertical Average Rig Count Forecast
Land Rigs Land Rigs
200 Current: 184 rigs (8/19/11)
250
180 Directional/Horizontal 220
210
160 Vertical 200
200
140 180
120
150
100
80
60 100

40
20 50

0
Dec-09

Dec-10
Aug-09
Oct-09

Aug-10
Oct-10
Jun-10

Jun-11
Feb-10
Apr-10

Feb-11
Apr-11

0
2011 2012 2013 2014

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
Sensitivity Analysis of 2011 Bakken Pressure Pumping Capacity Utilization

250% 241%
2011 completions + backlog
42%

201%
200%
2011 completions 35%
161%
150% 28%
121%
21% 199%
100%
100%
utilization of
166%
2011 133%
50% 100% capacity

0%
15 20 25 30
Average Stages per Well
The Bakken will be 61% under-supplied in 2011, conservatively
assuming 20 stages/well
Sources: CIBC World Markets; Macquarie; PacWest analysis


Demand will continue to outpace supply for pressure pumping capacity
into 2012 in the Bakken
Sensitivity Analysis of 2012 Bakken Pressure Pumping Capacity Utilization

200% 2012 completions + backlog
180% 2012 completions

160% 159% 152% 146% 140%
140% 45% 100% utilization 43% 42%
120% of 2012 40%
capacity
100%
80%
60% 114% 109% 100%
104%
40%
20%
0%
30% 40% 50% 60%
Capacity Growth (2011 – 2012)

Note: Sensitivity analysis assumes an average of 20 frac stages / well in 2012, a conservative estimate
Source: CIBC World Markets; Macquarie; PacWest analysis


Staffing experienced crews is a critical challenge faced by pressure
pumping service providers
The Quality vs. Quantity Dilemma

■ 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



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

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 pressure pumping supply has been unable to keep pace with
demand so well completion backlogs are growing
Days Required for D&C in North Dakota
180
172
Spud and Completion
Days between Well

120 107 118
103
90 85 76 87 96
81 82 99 95 98 103 93
60 67 72 67 80 81
50 57

0

Bakken Well Count (May 2011)
500
Number of Wells

400
300
200
100
0
Uncompleted Drilling Permitted
Bakken 429 162 413
Montana 57 6 67
North Dakota 372 156 346
Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis


Operator D&C performance varies, in some cases depending on
contracting practices
Bakken Ratio of Uncompleted Wells to Active Rigs (May 2011)

Well
Backlog Rigs
Anschutz/OXY 1.0 7 7
Continental Resources 1.8 45 25
Whiting Oil & Gas 1.9 29 15
Zenergy 2.0 12 6
Brigham Oil & Gas 2.4 17 7
ConocoPhillips 2.6 13 5
Hess 2.7 48 18
Slawson 2.8 17 6
Newfield 3.0 15 5
EOG Resources 3.4 34 10
Marathon 3.6 25 7
Oasis Petroleum 4.5 27 6

0 1 2 3 4 5
Note: Well backlog is best estimate based on data from Montana and North Dakota oil/gas regulators; rig count is from April 2011
Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis


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

PacWest Difference Shale Supply Market Service
 Key differentiator: turning market data  Subscription-based market intelligence
and intelligence into meaningful and product with quarterly releases
actionable information  Includes multiple components:
 Transform volumes of disparate market - Unconventional Supplier Database:
data, industry insider activity, and field- 100+ suppliers
level intelligence and expert input into
- Supplier Market Insights report
strategic and actionable
recommendations for decision-makers - Monthly Frac Analysis report
 Aggregate, organize and distill a wide - Pressure Pumping Monitoring report
range of data and intelligence to - D&C Cost Escalation report
provide information to our clients that is  All components are also available as
comprehensive, focused, and strategic stand-alone products
 Analyze this information to assess its  Frac Database high value frac data set –
strategic implications and provide a first product of its kind available on
clear path of action for each stakeholder market


Agenda

1) Introduction





6) About PacWest

7) Questions


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