Creating Clarity and Certainty for Shale Gas Development

A British Columbia ExampleShad Watts – Community Consultation & Regulatory Affairs Nexen NEBC Shale Gas

May 17, 2012

Agenda

Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity

Tenure Acquisition

Fiscal Incentives

Effective & Efficient Regulation

Shale Gas Case Study

Nexen Asset Positioning

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____________________Resource Potential Estimate Source: Wood Mackenzie.

SAN JOAQUINBASIN

McClure

SANTA MARIABASIN

Monterey

UINTABASINBaxter

MancosPICEANCE

BASIN

PARADOXBASIN

Cane Creek

SAN JUANBASIN

MancosLewis BLACK WARRIOR BASIN

FloydConasuaga

Neal

BIG HORNBASINMowry

WILLISTONBASINBakken

BRITISH COLUMBIA/ALBERTAMontney

MICHIGANBASINAntrim

DELAWARE BASINBarnett

Woodford

BRITISH COLUMBIAHorn River

Muskwa

ARKOMA/ARDMORE BASINFayettevilleWoodford

Caney

Utica

Northeast British Columbia

Potential LNG Facility

North American Unconventional Resource Plays

Marcellus Shale: 197 Tcfe

Haynesville Shale: 140 TcfeEagle Ford Shale: 10 Tcfe

Barnett Shale: 61 Tcfe

Fayetteville Shale: 26 Tcfe

Montney: 55 Tcfe

NEBC Shales (Horn River: 104 Tcfe)

APPALACHIANBASIN

MarcellusHuron

Horn River Basin: Top Quartile Shale Play in North America

Third largest resource play in North America

500 net foot interval averages 50% thicker than the Barnett

High silica content shale is very brittle and fracable

10+ year land tenure with minimal drilling required to hold

Attractive tax regime and royalty structure

Competitive resource recovery (EUR) with 6 – 15 Bcf wells

Viable North American LNG export option

Ideally located to supply growing oil sands demand

Cordova Embayment extends platform

Nexen Ownership Summary

~172,000 acres in Horn River and Cordova

~128,000 acres in Liard

60% working interest

100% operated

Ownership in Cabin Gas Plant

Woodford Shale: 12 Tcfe

~128,000 net acres ~90,000 net acres ~82,000 net acres

Nexen Total NEBC Basin Acreage: ~300,000 net acres

Takeaway Capacity

Spectra Plant100 MMcf/d

Cabin Gas Plant5% Nexen WI in Phase 1

400 MMcf/d gross processing capacity

Expected online mid-2012

20% Nexen WI in Phase 2400 MMcf/d gross

processing capacity

Shale Gas Overview

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Shale Gas Overview

Northeast British Columbia

STAGES OF SHALE GAS EXPLORATION AND DEVELOPMENT

• A stepwise approach through exploration and appraisal… • Technical feasible – defining and characterising the a viable play concept; • Commercial feasiblity – cracking the nut leading to cost effective reservoir

productivity; • Commercial demonstration through pilot programs prior to project sanction

30+

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Development Requirements NEBC

1. Permanent Roads and year round access.2. Well pads with many (8-20) horizontal wells

• One pad per 3 square miles.• Triple Drill Rigs (5000m); self moving • Surface footprint only 5-10% of traditional equivalent

vertical well development • Innovative application of technology to reduce

development costs.3. Completion (fracing) of Horizontal Wells.

• 16-20 fracs per well. • 3+ fracs per day.• exclusively slick water* fracs .• typically 200-350 tonnes sand per frac (2-4 railcars).

4. Appropriate pipelines to and from the well pads

*Slickwater or slick water fracturing is a method or system of hydro-fracturing which involves pumping water & sand with a friction reducer.

Shale Gas Overview

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5. In field Facilities / Gas Compression• Dehydrate and compress gas• Formation water filtration & disposal

6. Takeaway pipeline to Area Gas Plant(s)

7. Area Gas Plants that will further process the gas• Remove CO2 and trace H2S• Compress to sales pipeline pressures

8. Sales pipeline to transport gas to market

Development Requirements NEBCShale Gas Overview

Horn River Basin – Drilling (18 well pad)Shale Gas Overview

b-77-H/94-O-8 Pad 2011

Horn River Basin – Completions (9 well pad)

c-1-J/94-O-8 Pad 2011

Shale Gas Overview

• Distance to market

• Undeveloped local service sector / distance to services

• Lack of infrastructure and difficult surface access

• Understanding the reservoir

• Long time before positive return

Shale Gas Overview

Development Challenges NEBC

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Drilling24%

Completions43%

Pad Construction2%

Pad Facilities & Pipelines9%

Field Infrastructure8%

Site Operations

14%

Shale Gas Overview

Drilling = $127,687/day Completions = $640,693/day

(excluding materials)

Large upfront capital requirements

Development Challenges NEBC

How to get the most gas usingthe least frac water & proppant ? How to get the most gas usingthe least frac water & proppant ?

What to put on the books ?What to put on the books ?

Deliverability and EUR for each well ?Deliverability and EUR for each well ?

How important are naturalFractures ?How important are naturalFractures ?

How many frac stages & how far apart ?How many frac stages & how far apart ?

Where should laterals be placed ?Where should laterals be placed ?

What is the best well spacing,length & orientation ?What is the best well spacing,length & orientation ?

Best flowback practices to enhance performance ?Best flowback practices to enhance performance ?

Planar bi-wingor complex fracs ?Planar bi-wingor complex fracs ?

Is there a sweet spotin the reservoir ?Is there a sweet spotin the reservoir ?

THE SHALE GAS DEVELOPMENT CHALLENGE

How much infrastructure and when to expand ?How much infrastructure and when to expand ?

Market contracts and takeaway capacity ?Market contracts and takeaway capacity ?

How to reliably assess to services?How to reliably assess to services?

How much free & absorbed gas ?How much free & absorbed gas ?

How much is it going to cost ?How much is it going to cost ?

Shale Gas Overview

Key Messages – What It Takes

Quantitative – Below Ground

• Positive expected monetary values Cumulative distribution of NPV that incorporates mitigation decision points and key subsurface risk and uncertainty ranges

• Acceptable risked capital levels

• Attractive success case valuation

Qualitative – Above Ground

• Favorable fiscal terms and incentives that promote exploration and risk sharing

• Terms of tenure aligned with the “unconventional” timelines for exploration, appraisal and development

• Sanctity of contract

• Stable, streamlined, open and transparent regulatory structure

• Infrastructure to customer

• Liberalized gas market

• Political stability

• Secure and predictable operating environment

• Legitimate government consultation on regulation, terms and policy

Shale Gas Overview

Agenda

Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity

Tenure Acquisition

Fiscal Incentives

Effective & Efficient Regulation

Shale Gas Case Study

Oil & Gas TenureTenure Must Facilitate Responsible Development:

• Should stimulate work activity rather than be viewed as a revenue generation mechanism

• Clear definition of exclusive rights geographically

• Appropriate to resource developed in the term, and geographical extent

• Risk sharing through flexibility in commitments for work or cash in lieu with optionality for staged commitments related to market.

• Maintains competitiveness through market pricing with no minimum bids but don't have to award if less than fair award price

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Certainty in Subsurface Rights

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• Exploratory effort is rewarded with the right to produce, delineation of a pool allows the tenure to be held beyond the end of its term

• Longer tenures are granted in areas with poorer infrastructure

• Oil and gas tenure grants the rights to the resource only - permitting of exploration and development activities is managed separately by an independent agency

• Unused rights return to the Crown at the end of the tenure term

Principles of British Columbia’s Tenure System

Oil & Gas TenureCertainty in Subsurface Rights

Tenure Types in BC

Drilling Licences (3, 4, or 5yr term)• Exploration type of tenure• Different terms depending on location• Encourages Development

Leases (5 or 10yr term)• Production form of tenure• Held in perpetuity

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Certainty in Subsurface Rights

Agenda

Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity

Tenure Acquisition

Fiscal Incentives

Effective & Efficient Regulation

Shale Gas Case Study

A SUCCESSFUL FISCAL REGIME

• Fiscal regime that shares risk / incents activity

• Provides long term certainty

• Enable accelerated capital cost recovery for capital intensive plays

• Facilitate resource development through access cost sharing in remote areas (roads and pipe)

• Incent zone specific production through target credits

• Recognize seasonal or operational constraints

Shale Gas Case Study

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BC’s Targeted Royalty ProgramsFiscal Incentives

Impact of BC Royalty Programs

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• $1.3 billion in incremental royalties since 2004/05

• 21% increase in BC’s natural gas revenues

Fiscal Incentives

Agenda

Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity

Tenure Acquisition

Fiscal Incentives

Effective & Efficient Regulation

Shale Gas Case Study

Efficient and Effective Regulation

• Considers Operational requirements, risk, and technical considerations

• Built collaboratively

• Flexible

• Approvals received in a timely manner

• Incent desired practices

• Results based – focus on compliance

Government and Ministries • Set Policy and Legislation

• Award Tenure

Oil and Gas Commission• Provides Permits &

Approvals• Compliance & Enforcement

Industry • Develops

Projects

E.g. Oil and Gas Activities Act

E.g. Drilling and Production Regulation

Provincial Legislative FrameworkEffective & Efficient Regulation

Specified Enactments

Land Act:Section 14 Temporary Occupation of Crown LandSection 39 Licence of OccupationSection 40 Right of Way

Water Act: Section 8 Short Term Use of WaterSection 9 Changes in and About a StreamSection 26 Permits over Crown Land

Forest Act:Section 47 Master Licence to CutSection 117 Road Use Permit

Other Enactments:Section 12 Heritage Conservation ActSections 9, 14 & 15 Environmental Management Act

The BC Oil and Gas Commission serves as a “single window” agency provided with legislative authority for authorizations

under several Acts.

Effective & Efficient Regulation

One Window Approach

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Oil and Gas Activities Act (OGAA)• More efficient approvals for multiple related activities• Increased compliance and enforcement mechanisms• Increased landowner/stakeholder support• Increased environmental protections• New appeal provisions• Maintains specified enactments

Drilling & Production Regulation

Environmental Protection & Mgmt Regulation

Reg

ula

tory

Fra

mew

ork

Geophysical Exploration Regulation

Administrative Penalties Regulation

Consultation and Notification Regulation

Reg

ula

tory

Fra

mew

ork

Pipeline Regulation

Structure of OGAAEffective & Efficient Regulation

Project Lifecycle – What the Commission Regulates

6. Operations• Risk based

inspections• Compliance

Programs and Audits

2. Application • First Nations

Consultations• Application Review

7. Abandonment / Reclamation• Certificate of Restoration Process• Orphan Fund

1. Pre-Application• Consultation/Engagement by

Industry with landowners, other stakeholders/First Nations and Government/Commission

3. Decision (21 days)• Permit issued or declined

with reasons• Conditions attached as

appropriate

4. Construction• Inspections and

Enforcement

5. Leave to Open/Production • Review project to ensure it is

compliant and ready to commence operations

One Window ApproachEffective & Efficient Regulation

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WELL PERMIT APPLICATION FORM OGC, 100 10003 110 AVE

Fort St. John, B.C. V1J 6M7 Phone: (250) 794-5200

Date Received

THIS IS AN AUDITABLE DOCUMENT FOR INSTRUCTIONS REFER TO THE WELL PERMIT APPLICATION MANUAL

COMMISSION USE ONLY A

Commission File No.: WA No.: Document :

Application Category: Routine Non-Routine Application Fee: $

Well Classification: Objective Field: Objective Field Code:

ADMINISTRATION B

Applicant Name:

Address:

City, Province, Postal Code:

Contact: Email: Phone: Referral Company: Email: Phone:

Agent Name: Internal File No.:

APPLICATION INFORMATION C

ePASS No.: Surface location (NTS/DLS):

Well Name:

New Permit Holder Application Fee Applicable Yes No

Primary Well Application Subsequent Well Application with new area

If this is a subsequent well application, enter the primary WA No.: _____________ and Commission File No.: _______________

Revision to Commission File No. :

Re-entry COR/WA No.:

Water Source Well

Is the water source well designed to operate at a rate greater or equal to 75 litres/second? Yes No

Disposal Well Injection Well

Cross Reference to other Commission File No. (if applicable):

Is this well within an area designated as a special project using innovative technology under section 75(1)(b)?

Yes – Approval No.: _____________ No

LAND STATUS D

Area Of Activity: North Central South MKMA ALR SYD

Forest District(s): Master Licence To Cut (MLTC) No.:

Crown Land Private Land

Is there a Timber Reservation charged against the title? Yes No

Review Corridor applied for Cross reference to existing review corridor, OGC file no.:

Total woodlot licence area ha

Total area private land ha

Total area Crown land ha

Total new Crown land area disturbance ha

Total application area proposed ha

Area of Crown land for wellsite only ha

FIRST NATIONS CONSULTATION / ABORIGINAL COMMUNITY NOTICE PACKAGE N/A E

Ensure the following are attached to the application for First Nations consultation purposes: Aboriginal

Community Notice Consultation Attachments

KLCN BRFN MLIB Cover letter (2 copies for each consultation and notification area affected)

KLFN DENE THA

PRFN Application Form

KLMSS DRFN SFN Mapping requirements

FLFN FNFN WMFN Archaeological Assessment Information Form

Other HRFN Archaeological Reports, if available

Other: Fibre Utilization Plan

Other Documents

PETROLEUM & NATURAL GAS TENURE RIGHTS F

Permit, Drilling Licence or Lease Number(s) (for bottom hole location(s), plus heel to toe locations): __________________________ _________________________ _________________________ _______________________ Is the applicant the registered holder of the petroleum and natural gas rights? Yes No

WELL SPECIFICATIONS G

Directionally drilled Vertically drilled Horizontally drilled

Well Centre Coordinates (UTM) Zone: N: E:

Surface Coordinates: N/ S (m) E/ W (m) from corner of Ground Elevation (m): Proposed Bottom Hole

Location(s) & Heel Location (s)

Objective Formation(s)

Objective Fluid (oil, gas or water)

Objective Depth(s) (m TVD)

Core (Y/N)

Expected TD Formation at: TD

BOP Class

( m TVD) (m MD)

PROPOSED CASING PROGRAM H

Bit Size (mm)

Casing Size (mm O.D.)

Linear Density (kg/m)

Grade New or Used Setting Depth (If directional, enter m TVD and in MD)

DRILLING INFORMATION I

Drilling fluid type: Gelchem KCI Air Hydrocarbon Based:

Other – Specify Type:

Underbalanced drilling? Yes No Managed pressure drilling? Yes No

Is a remote sump being applied for with this application?

Yes No If yes, remote sump must be shown on the construction plan.

SOUR WELL INFORMATION (H2S RELEASE RATE > 0.01 m3/s) N/A J

List expected sour zones and their corresponding maximum H2S content (%):

Cumulative H2S release rate (m3/s): Drilling: Completion:

Emergency Planning Zone radius (km): Drilling: Completion:

Distance to nearest occupied dwelling (km): Distance to nearest Urban Center (km):

Are there any occupied dwellings, public facilities, numbered or named highways, rivers and lakes, recreation areas, places of business and/or egress inside the calculated Emergency Planning Zone? Yes No

Effective & Efficient Regulation

Streamlined Application

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Horizontal Wells

Environmental Protection

• 20 Horizontal wells from one 260x175m pad• Each frac stage in hz well is equivalent to a vert. well

• Would need 320 vertical wells • Vertical wells each on a separate 100m x 100m pad

• Same amount reservoir contacted in both scenarios• 85% less surface disturbance

Vertical Wells

Effective & Efficient Regulation

Environmental Protection

Small Lake Complexes

• Collaborative effort bw industry and government

• Calf mortality decreases when selected

• Calf recruitment success increases

• Predators are avoiding/don’t select

Lakes 1 ha – 10 ha within 200m proximity of each other250m buffer applied

2000 meters

Effective & Efficient Regulation

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What is Water Used For?

Road and well pad

construction

Drilling

Well completions

Transportation/pipelines 31

Oil and Gas

Water uses – Shale GasEffective & Efficient Regulation

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Water requirements

Nexen Horn River Basin:• 1 pad per year

• 16-18 frac stages per well, 20 wells per pad

• Frac design:

• 3300 m3 per frac stage and drill-outs

• 60,000 m3 per well x 20 wells per pad

• 200-350 tonnes frac sand per frac

• Total annual requirement of ~1,200,000 m3 of water & 80,000 – 140,000 tonnes of sand

Effective & Efficient Regulation

Approximately2500 metres below surface

Potable Water Wells: <150-300 metres

Surface casing

Additional steelcasing andcement toprotect groundwater

Protective Steel Casing

Potable Groundwater Aquifers

Hydraulically fractured shales

Water Protection - Well Construction

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Effective & Efficient Regulation

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Licensed Withdrawal

• Variable withdrawal rates are designed to mimic seasonal variations in flow

Flow ConditionInstream

Flow Range (2011)

Withdrawal Parameter

Flood Stage: 80% > inferred median

> 1.652 m3/s25% of

mean daily discharge

High Flow: > inferred median

0.918 – 1.651 m3/s

15% of mean daily discharge

Normal Flow: < inferred median

0.918 – 0.352 m3/s

10% of mean daily discharge

Zero Withdrawal Limit < 0.351 m3/s (30% of mean

annual flow - ice free period)

0

Maximum Withdrawal Limit 2 500 000 m3/year

0.00

1.00

2.00

3.00

4.00

5.00

6.00

22-Apr-10 12-May-10 1-Jun-10 21-Jun-10 11-Jul-10 31-Jul-10 20-Aug-10 9-Sep-10 29-Sep-10 19-Oct-10

Mea

n Dail

y Disc

harge

(m3 /s)

Tsea River at W7 - 2010 Discharge Tsea River at W7 - 2010 Allowable WithdrawalInferred Median Flood StageZero Withdrawal Limit 2010 Used

Total Discharge (April to October): 17 600 000 m3

Total Allowable Withdrawal: 3 400 000 m3 (19% of total)Current use capacity: 2 000 000 m3 (12% of total)

25% of MDF

15% of MDF

10% of MDF

0 Withdrawal

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Effective & Efficient Regulation

Conclusions

Capital Intensive Development

Governments and industry need to work together

Different phases of development need to be recognized

Focus on results based regulatory framework to enhance efficiency and flexibility