How unconventionals are changing global oil and gas markets

1 How unconventionals are changing global oil and gas markets CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of mckinsey & company is strictly prohibited Edinburgh, 7th November 2013 Presentation to the Scottish Oil Club Disclaimer: this material was presented in a private forum and is not intended for wide use. The views represented here are those of the authors, not necessarily those of mckinsey & company mckinsey & company | 1 Contents Overview of mckinsey in Oil and Gas Overview of the global context Overview of Light Tight Oil (LTO) Overview of shale gas mckinsey & company | 2 global firm with >8,500 management consultants More than 100 offices in 60 countries Serving the world s leading institutions for over 85 years Expertise in all industries, , energy, pharmaceuticals, telecommunications, healthcare, insurance, banking Who is mckinsey & company ?

2 SOURCE: mckinsey & company mckinsey & company | 3 3 l 4 of the top 5 players 3 of the top 5 players 9 of the top 10 players 3 of the top 5 players 9 of the top 10 players Since 2008 mckinsey has served 75% of the top 50 oil & gas companies worldwide 3 of the top 5 players N. America Latin America Africa Europe Middle East Asia Companies served in the last five years1 1 Companies in PIW Top 50 by country of origin; at least one engagement since 2006 SOURCE: PIW Top 50 global Companies (2011 ranking); Oil & Gas Practice 4 of the top 5 players FSU mckinsey serves many of the world s oil & gas industry shapers mckinsey & company | 4 4 Today s presenters Mark Davis Peter Lambert Junior Partner Senior Expert SOURCE: mckinsey mckinsey & company | 5 Contents Overview of mckinsey in Oil and Gas Overview of the global context Overview of Light Tight Oil (LTO) Overview of shale gas mckinsey & company | 6 6 Demand for oil is expected to grow around 1% per year SOURCE: Energy Insights, global Energy Perspective.

3 mckinsey global Institute (MGI) % CAGR, %, 2012-2025 Reference case Continuation of current trends (econ. growth, technological progress, GHG regulation) Avg. GDP growth rate: global growth renewed Continued growth in emerging markets fueled by China Avg. GDP growth rate: global lost decade Major emerging markets are unable to insulate themselves against the slowdown in global growth Avg. GDP growth rate: Projected global petroleum products demand Million barrels of oil equivalent per day mckinsey & company | 7 SOURCE: Energy Insights Gas demand will grow by 2% per year, driven by Asia global natural gas consumption Trillion ma E Europe/Eurasia Non-OECD Asia Middle East Row 2020 2010 2035 2010-2035 CAGR mckinsey & company | 8 unconventionals are a small but fast-growing part of overall supply 2007-12 Growth rate % per year 2012 share % of total 93% 7% 40% 02040608010002 03 05 04 06 2000 01 Conventional oil US Light Tight Oil 07 08 09 10 11 12 0123410 11 12 07 08 01 2000 05 04 09 06 02 03 US shale gas Other gas1 98% 2% 61% SOURCE.

4 BP Statistical Review; Energy Information Administration; Drilling Info 1 Includes Coal Bed Methane and Tight gas Sources of global gas production Trillion Cubic Meters Sources of global oil production Billion Barrels mckinsey & company | 9 unconventionals has made fracking more popular than peak oil SOURCE: Google Trends November 2013 mckinsey & company | 10 Contents Overview of mckinsey in Oil and Gas Overview of the global context Overview of Light Tight Oil (LTO) Overview of shale gas mckinsey & company | 11 SOURCE: HPDI; EIA; mckinsey analysis; NEB 37632847257,4601,4169,183 Mar-13 Increase in LTOC onventional prod.

5 + de-mandtrends307 Mar-1102004006008001,0001,2001,4001,6001 ,8002,000 Other US LTO PlaysMississippi LimeWoodfordNiobraraBone SpringAustin ChalkSprayberryGranite WashBakkenEaglefordMade by Energy Insights. Released October Other 1 L48 = Lower 48 states (excludes Alaska & GoM) L481 US 100% = MMb/d 100% = MMb/d Proportion of US crude oil production Percent of Mar. 2013 prod Comments Kbd 2000 02 04 06 08 10 LTO production1 Kb/d 2012 Financial crisis 2,000 kbod March 2013 100 kbod Dec 2005 US Light Tight Oil (LTO) reached 2 million barrels per day in March 2013 GoM & Alaska Rapid growth in US LTO LTO development in the US is happening at a faster pace than shale gas mckinsey & company | 12 Flared gas from unconventionals are visible from space SOURCE: NASA Eagleford Permian mckinsey & company | 13 North Dakota is peppered with well pads: LTO required very high drilling activity and well densities SOURCE.

6 Google Earth Image km x km, taken from 2500 m eye elevation mckinsey & company | 14 01234567891011121314152020201520102005 High LTOresourceConstant activityConstrained resourceConstrained resource& activityMade by Energy Insights. Released October s bottom up models expect significant growth from LTO by 2020 SOURCE: Energy Insights, EIA AEO 2013; Rystad; Belfer Center; Bentek; Bernstein Research; mckinsey ; EIA AEO2013;; multiple others US oil production MMb/d x LTO Lower 48 onshore conventional GoM Alaska 2020 LTO production MMb/d Boom is likely to lead to: Energy independence changing crude flows changing geopolitics Shifting supply balance mckinsey & company | 15 2007 7 to 9 >9 5 to 7 3 to 5 0 to 3 -3 to 0 -10 to -3 <-10 Mbbl/day LTO will impact crude flows and shipping markets SOURCE.

7 Energy Insights mckinsey & company | 16 US LTO will materially change global the supply cost curve, potentially stalling the development of deepwater Production cost, $/barrel, 2012 real global liquids cost curve of assets producing in 2025 Liquids supply, MM bpd 6040200105959085807570656055504540353025 20151050 West Africa DW NewCanada Oil sands NewWest Africa DW LTO LTO ExistingBrazil DW GoM DW NewCanada Oil sands GoM DW ExistingSaudi Arabia NewIraq NewVenezuela ExistingSaudi Arabia ExistingIraq ExistingOther liquids310080100 Venezuela NewOPEC spare capacityNon-crudeMade by Energy Insights exclusively for LBS.

8 Released September ,3 Non-OPEC2 Brazil DW Existing SOURCE: Energy Insights US LTO mckinsey & company | 17 But a continued LTO boom is not without risk on many fronts SOURCE: mckinsey analysis; multiple Need to understand the rocks Insufficient export infrastructure adds cost and lowers price Rigs constraints High CO2 content and (potential) methane leakage High water usage 2-3 barrels injected per barrel + disposal too Local opposition delays permitting. Pollution to ground water, air 700-1300 trucks per well (equipment, fluids, waste) How long do we expect the fiscal and /or export regime to remain?

9 Technology & skills Hardware Water Noise Government support Land use & pollution CO2 & flaring Infrastructure mckinsey & company | 18 Large LTO resources in the ROW might also add to the supply mix SOURCE: EIA (June 2013) 991313182627325875 Mexico Venuezuela Australia Libya Argentina China Canada Pakistan United States Russia Shale oil technically recoverable BBBL mckinsey & company | 19 Summary so far .. and some leading questions SOURCE: mckinsey Light Tight Oil is booming and is making a material impact on US oil supply Already LTO is changing international crude flows, trade and geopolitics We expect LTO in the US to continue rapid growth trajectory But there are many subsurface challenges and risks Operating behaviour: how will producers behave and by how much will well efficiency improve?

10 Geoscience: how quickly can the industry increase its fundamental understanding of the reservoir effectiveness? Technology: Will shale technology plateau or see substantial advances in the coming few years? Environment: how will the story on gas, emissions, water, noise, and pollution play out? Regulation: How much will evolving regulation and litigation affect the industry Infrastructure: how and when will bottlenecks change the game? Signposts to watch Summary mckinsey & company | 20 Contents Overview of mckinsey in Oil and Gas Overview of the global context Overview of Light Tight Oil (LTO) Overview of shale gas mckinsey & company | 21 SOURCE: EIA; Deutsche Bank; Shale ; USGS; NPC; company announcements; Team analysis US gas resources have nearly doubled in 10 years Major US shale gas and liquids resources Niobrara Cody Mowry Gammon Excello- Mulky Marcellus (256) Devonian Chattanooga Conasauga Floyd-N