The Shale Revolution – Myth or Reality?

Nicolas Meilhan

Principal Consultant, Frost & Sullivan

February 2016

2

Where is this shale revolution coming from? It is the application of two mature technologies - hydraulic fracturing and horizontal drilling - in

a new context to unlock oil and gas from well-known rock formations with low permeability

Following vertical drilling down to the shale bed rock, drilling is deviated to achieve a horizontal direction.

The resulting horizontal bore is then punctured at various locations to weaken the bedrock

High-pressure water containing various fracturing chemicals and sand is injected into the perforations to

induce artificial fracturing of the rock and facilitate the permeation of gas into the well

Source: EIA

3

Where can we find shale resources? Shale resources are distributed much more widely than conventional oil & gas fields

Source: EIA, December 2015

4

How did the shale gas revolution in the US impacted gas prices? A natural gas surplus in the United States has pushed prices down – below 2$/MBTU in 2016

• Natural gas is a regional market as it needs a costly infrastructure to transport and store it, while oil is a

global market as it is easy to transport & store as a liquid

• In Asia, gas prices used to be especially high – 4 times as high as in the US in 2012 – supported by strong

economic growth in China & the switch from nuclear to fossil fuel in Japan to produce electricity

• With the economic slowdown in China and the restart of nuclear power plant in Japan, Asian and European

sport prices have levelled off around $8 per MBTU

Source: Frost & Sullivan analysis

Natural gas spot prices - $/MBTU, 2012 -

5

Is shale gas production profitable in the US? As breakeven prices varies from 4 to 8 $/kcf, the shale gas industry has been selling shale gas

at a loss since 2009

2008 financial crisis

+

Ever increasing number of rigs drilling in the US

+

Lack of infrastructure to transport it

=

Natural gas surplus in the US pushing prices down from 11$/kcf in 2008 to 2$/kcf in 2012

Source: Jean Laherrere, November 2013; Art Berman

Break-even gas price US Number of gas rigs vs. Natural Gas price

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Producing shale gas or producing shale oil? That is the question...

• The "baby drill” practice is due to the shale oil boom, itself caused by the high oil price and the easy money

flows provided by the eased monetary policy

• After the gas prices crashed in July 2008, most of the rigs where transferred from shale gas to shale oil

which explains the current shale oil boom

US rig count

Source: Ron Patterson, February 2016, Baker Hugues

Nu

mb

er

of

rig

s

7

What is the upper limit for shale oil and gas production in the US? Probably not the sky as US shale gas production in July 2015 after the US shale oil

production peaked in April 2015

Source: EIA

US tight oil production - Millions barrels of oil per day-

US shale gas dry production - Billion cubic feet per day -

Sh

ale

ga

s d

ry p

rod

uc

tion

(b

illion

cu

bic

fee

t pe

r da

y)

Cru

de

oil p

rod

uc

tion

(m

illion

s b

arre

ls p

er d

ay)

8

What are the future prospects for natural gas production in the US? Down as total natural gas dry production peaked again in September 2015 since shale gas

additions did not compensate any more the decline of conventional natural gas production

Source: EIA

US natural gas dry production - Billion cubic feet per Day, 2006 to 2015 -

0

10

20

30

40

50

60

70

80

Shale Gas Conventional Gas

Na

tura

l g

as

dry

pro

du

cti

on

(b

illio

n c

ub

ic fe

et p

er

da

y)

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What are the future prospects for crude oil production in the US? Down as total crude oil production peaked again in July 2015 since new shale oil wells did not

compensate any more for the decline of existing shale oil wells

US crude oil production - Millions barrels per day, January 2010 to April 2016 -

Cru

de

oil

pro

du

cti

on

(m

illio

ns b

arr

els

pe

r d

ay)

Source : EIA

5

6

7

8

9

10

Jan

10

Jan

11

Jan

12

Jan

13

Jan

14

Jan

15

Jan

16

Tho

usa

nd

s

8.8

9.0

9.2

9.4

9.6

No

v 1

4

Jan

15

Mar

15

May

15

Jul 1

5

Sep

15

No

v 1

5

Jan

16

Mar

16

Ap

r 1

6

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The Shale Revolution - Myth or Reality? It is a reality in the US with more than 50% of both crude oil and natural gas production.

It is still a myth elsewhere and much higher price are needed to turn it into reality

Bird’s eye view of a Texas shale gas field - Click on the image-

Source : Google maps: https://goo.gl/maps/gE9Dp

11

The US Energy Independence - Myth or Reality? Even though they are currently self-sufficient gas-wise, the energy independence is not for

tomorrow as they still imports 7 millions barrels per day i.e. 40% of their crude oil consumption

Crude oil net imports from the top 5 importers

- Millions barrels per day, 1986 to 2015 -

Source: EIA, BP

Cru

de

oil

ne

t im

po

rts

(m

illio

ns b

arr

els

pe

r d

ay)

0

2

4

6

8

10

12

China India Japan South Korea United States

12

The US Oil Independence from Saudi Arabia - Myth or Reality? In 2014, the US imported 1.2 million barrels per day from Saudi Arabia, an increase of 10%

compared to 2011 when the shale oil revolution had not started yet

US Crude oil net imports by country of origin - Millions barrels per day, 1973 to 2015 -

Source: EIA

Cru

de

oil

ne

t im

po

rts

(m

illio

ns b

arr

els

pe

r d

ay)

0

2

4

6

8

10

Others

Colombia

Kuwait

Iraq

Venezuela

Mexico

Saudi Arabia

Canada

13

Nicolas Meilhan Principal Consultant

Energy & Transportation Practices

(+33) 1 42 81 23 24

nicolas .meilhan@frost.com