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PacWest Consulting Partners920 Memorial City Way, Suite 160
Houston, TX 77024
Developing Emerging International Shale PlaysSupply Chain Challenges & Constraints
TERMS & CONDITIONS Information furnished in all reports produced by PacWest may be used by Client for internal purposes, as Client deems beneficial, as long as due care is taken to hold the information confidential within Client’s organization and PacWest is not liable for the information provided.
All rights to the information remain with PacWest. PacWest represents that it will not breach any obligation of confidentiality with respect to information contained in the study. PacWest will maintain in confidence and not disclose any information related to Client, without prior written consent of the Client. PacWest will not disclose to any person, including, without limitation, any of the Client’s competitors or suppliers, the fact that Client has engaged PacWest in this project scope, the scope of the assignment or any other information relating to Client.
IAPG Congreso Latinamericano y del CaribeBuenos Aires, Argentina9 August 2012
Alexander Robartarobart@pacwestcp.com+1 434 294 1396
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 2
Agenda
1) Introduction
2) North American Market Update
3) Supply Chain & Infrastructure Constraints
4) International Unconventional Development
5) US Analogue: Bakken
6) Questions
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 3
Provide strategy consulting and advisory services to energy, industrial, and resources clients
Strength in the oilfield supply market- Often work with E&Ps or suppliers
across range of industries that supply products/services to it
Generally work at C-Level or business lead level
Consulting & Advisory Offer industry-leading, granular
analysis of the oilfield
Deep knowledge and strength in the pressure pumping / frac market
Employ combination of primary intelligence + secondary research
Unique in market: apply strategy consulting capabilities to turn research into actionable intelligence
Market Intelligence Products
All key staff come from top-tier strategy firms; consulting and market intelligence capabilities reinforce/inform each other
PacWest is a boutique strategy consultancy and market intel firm specializing in energy, industrial, resources; strength in the oilfieldPacWest Overview & Capabilities
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 4
Breakdown of pressure pumping fleets/capacity by basin and supplier with strategic analysis of latest regional supply market trends
Interactive database of 100+ critical unconventional suppliers
Cost escalation forecast for major D&C categories
Stripped-down version of PumpingIQ: regional frac fleet/capacity counts, by pumper, and other key data points from PumpingIQ
Database of fracs including basin, operator, pumper, chemicals, chemical suppliers
Product Description
PacWest Market Intelligence Product Offerings
PacWest currently offers multiple oilfield market intelligence product offerings to support subscriber decision-making
Adding international coverage to PumpingIQ in upcoming quarterly release
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 5
Agenda
1) Introduction
2) North American Market Update
3) Supply Chain & Infrastructure Constraints
4) International Unconventional Development
5) US Analogue: Bakken
6) Questions
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 6
Today’s US Hot Spots: Oil/Liquids-rich
Source: PacWest
There are dozens of active plays in the US, but majority of activity has shifted to a handful of key oil/liquids-rich plays
Bakken
DJ Basin/Niobrara
Eagle Ford
Permian Basin
Granite Wash
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 7
The dramatic shift to oil/liquids plays over the last three years is highly visible in the US Land rig count
US Rig Count, Oil/Gas Split
Jan-00Jun-00
Nov-00
Apr-01
Sep-01
Feb-02
Jul-02
Dec-02
May-0
3
Oct-03
Mar-0
4
Aug-04Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-0
8
Oct-08
Mar-0
9
Aug-09Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0% % Gas% Oil
Tota
l Rig
s
Source: Baker Hughes Rig Counts, PacWest Analysis
Gas rigs down
Oil rigs up!!
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 8
Frac supply has lagged behind demand, but we expect capacity to increase by 16.5% over 2012 to 15.5MM HHP at year-endUS Frac Supply
Frac Capacity (11Q3-12Q4) Comments■ Frac capacity additions have lagged pressure
pumping demand increases until recently, but supply in 2012 has expanded much more quickly than demand
■ We expect frac capacity to increase by 2.2 million HHP over the course of 2012, for a total EOY frac capacity of 15.5 million HHP, an 16.5% increase on EOY2011
11Q3 11Q4 12Q1 12Q2 12Q3 12Q40
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
US F
rac C
apac
ity (M
M H
HP)
+16.5% YoY
Analysis Dated May 2012
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 9
There has been a massive redeployment of capacity from key gas plays (-1.1MM HHP) to liquids plays (+3.3MM HHP)US Frac Capacity OutlookFrac Capacity in Key Gas Plays (11Q3-12Q4)
Frac Capacity in Key Liquids Plays (11Q3-12Q4)
Comments■ We expect more than 1.1 MM HHP of frac
capacity to be redeployed from key gas plays during 2012, driven primarily by deployments out of the Haynesville and Fayetteville,
■ We expect aggregate capacity in these 4 key gas plays to total 4MM HHP EOY
■ We expect more modest declines in frac capacity in the Marcellus/Utica and Barnett, as activity in the liquids-rich portions of these plays is creating a softer landing for suppliers
■ We expect a 52% increase in frac capacity in 2012 across the Eagle Ford, Permian, Bakken, Anadarko, and DJ Basin, for an EOY capacity of 9.7MM HHP
11Q3 11Q4 12Q1 12Q2 12Q3 12Q40
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000Marcellus/UticaHaynesvilleBarnettFayetteville
Frac
Cap
acity
(MM
HHP
)
11Q3 11Q4 12Q1 12Q2 12Q3 12Q40
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000 Eagle FordPermianBakkenAnadarkoDJ Basin
Frac
Cap
acity
(MM
HHP
)
Analysis Dated May 2012
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 10
Due to the recent shift to an oversupplied market, quarterly additions of new frac capacity are expected to slow dramaticallyFrac Capacity Additions, by Quarter
Frac Capacity Additions (11Q4-12Q4) Comments■ We expect 12H1 additions to comprise
nearly 75% of total 2012 frac capacity additions, 1.75MM HHP
■ Pressure pumpers have canceled or pushed back deliveries of new frac capacity because of expected oversupply issues in many US plays
■ We expect total 12H2 deliveries to total only ~600,000 HHP, or 25% of 2012 capacity additions
■ 12Q4 capacity additions are expected to amount to 72% less than capacity additions in 11Q4
11Q4 12Q1 12Q2 12Q3 12Q40
200,000
400,000
600,000
800,000
1,000,000
1,200,000
798,100
1,028,800
719,500
385,500
222,000
Frac
Cap
acity
(‘00
0s H
HP)
12H1 capacity additions: 1,748,300 HHP
Forecast
12H2 capacity additions: 607,500 HHP
Dramatic slowdown in fleet/capacity additions!!
Analysis Dated May 2012
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 11
Over the last six months, US frac capacity utilization has fallen below 100% for the first time in more than two yearsUS Aggregate Frac Capacity Utilization
US Aggregate Capacity Utilization (11Q4-12Q4) Comments■ Pressure pumping demand has outpaced
supply for the last two years, resulting in an aggregate utilization above 100%
■ Available pressure pumping supply surpassed demand in 12Q1, resulting in capacity utilization of 93%
■ We forecast capacity utilization to bottom out at 87% in 12Q2 and increase as pressure pumping demand increases in 12Q3 and 12Q4
■ We expect the year to close out with capacity utilization of 89% in 12Q4
11Q4 12Q1 12Q2 12Q3 12Q480%
85%
90%
95%
100%
105%
100%
93%
87% 88%89%
Frac
Cap
acity
Util
izatio
n
Forecast
Good news: low NAM utilization makes business case for redeploying fleets internationally much more compelling
Analysis Dated May 2012
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 12
Agenda
1) About PacWest
2) North American Market Update
3) Supply Chain & Infrastructure Constraints
4) International Unconventional Development
5) US Analogue: Bakken
6) Questions
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 13
Unconventional O/G carries with it significant supply chain and infrastructure implicationsUnconventional 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 take-away projects- Delay in infrastructure can significantly impact economics
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 14
Stimulation
Drillin
g Rig
Water D
isposa
lOCTG
D&C Fluids,
Chemicals
Loca
tion, Roads,
Flowlin
es
Contract
Labor
Artificia
l Lift
Directi
onal Dril
ling
Cementing
Fishing and Rental T
ools
Rig Mobiliz
ation
Bits and Reamers
Wire
line Perfo
rating and Lo
g...
Fuel, P
ower
Servi
ce Rigs
Heaters, Se
parators
Cuttings D
isposa
lTanks
Subsu
rface
Equipment
Wellh
ead, Casin
g Head
New Compresso
rs
Measu
rement
Valves a
nd Fitti
ngs0%
5%
10%
15%
20%
25%
30%
35%
40%
45%39%
11%9% 8%
4% 4% 4% 3% 3% 3% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% 0% 0%
% o
f Tot
al 3
-Yr S
pend
Operator 3rd Party Spend by Category (3-year)
Source: PacWest Analysis; Macquarie
Pressure pumping (frac), drilling rigs, and water will drive nearly 60% of 3rd party costs in many plays
Stimulation/Completion = 39%
Drilling Rigs = 11%Water Treatment/Disposal = 9%
Σ = 59%
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 15
As North American unconventional activity has increased, the supply chain has been forced to respond to a series of constraints Recent Areas Experiencing Supply Chain Constraints
Hydraulic Fracturing Services
Source: PacWest Analysis
Frac Equipment
Frac Sand
Frac Consumables
Water
Chemicals (guar)
Infrastructure
Rail Capacity
Storage
Takeaway Capacity
Labor
Frac Units
Frac Pumps
We will briefly talk through each of these
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 16
Global pressure pumping capacity is the single largest supply limitation to a rapid ramp up of global shale development
Global Reserves vs. Frac / Pumping Capacity
Source: Halliburton Analysis;, Barclay’s CEO Energy-Power Conference, Sep 2011
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 17
Annual frac capacity growth is expected to slow from its recent 33% annualized growth to 10% over the 2012 to 2016 timeframeGlobal Frac Capacity Forecast
2012-2016 Frac Capacity Forecast Discussion■ Total frac capacity growth is expected to
slow through 2016 from 33% to 10% CAGR- High 2008-2011 growth rate was led by
unprecedented 62% YoY growth over 2011 in North America
■ Global frac capacity growth is forecast to reset to a more restrained pace through 2014 and then begin to pick up again in 2015-2016- Increasing growth rates in 2015-2016 led by
NAM natural gas price increases and additions in emerging international shale
■ YoY 2012 capacity growth is forecast to slow from record 2011 high to 16%- Followed by just 4% growth in 2013, which is
expected to see the lowest growth rate over the forecast timeframe
Source: PacWest Analysis; company documents; field staff interviews; PacWest FracDB / FracFocus.org
2008 2009 2010 2011 2012 2013 2014 2015 20160
5
10
15
20
25
30
0%
20%
40%
60%
80%
7.3 8.2
9.9
17.1
19.8 20.7
22.1
24.3
27.6
12%
21%
73%
16%
4% 7%10%
13%
Frac
Cap
acity
(MM
HH
P)
Forecast
CAGR33%
CAGR10%
2011 growth peak
2013 growth trough
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 18
Starting in 2014, frac capacity additions are forecast to begin a shift from North America to international marketsGlobal Frac Capacity Forecast, by Region
2012-2016 Forecast Frac Capacity Additions Discussion■ Forecast frac capacity additions
of just 0.6 and 0.8 million HHP in 2012 and 2013 reflect a dropoff in demand for new equipment in North America- NAM continues to be the market
driver, but at significantly lower level than recent years
■ In 2014, international capacity additions are expected to increase significantly, while NAM additions remain flat
■ In 2015 and 2016, international additions are expected to continue to grow- NAM demand is also expected
to return with 7% and 9% growth, respectively
Source: PacWest Analysis
2011 2012 2013 2014 2015 20160
1
2
3
4
5
6
7
8
7.2
2.7
0.8
1.4
2.2
3.3
Frac
Cap
acity
(MM
HH
P)
93%
7%
88%12%
58%
42%
60%
40%
43%
57%
78%
22%
Good news: frac equipment manufacturing capacity is in
place to support international frac demand
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 19
Unconventional wells require significant amounts of high-quality frac sand, as well as resin-coated and ceramic proppantUS Aggregate: Frequency of Proppant Usage
Frequency of Proppant Usage (% of wells) Comments■ Frac sand is the most common
proppant type, used in 96.8% of wells
■ Resin-coated sand is the second-most common proppant type, used in 13.5% of wells
■ Ceramic proppant is the least common proppant type, used in 2.9% of wells
■ N.B. percentages do not add to 100% because more than one type of proppant is typically used in a single well
■ N.B. sample size is small in April 2012 and May 2012 due to reporting lag, so conclusions are uncertain for these time periods
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11Jul-1
1
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-
200
400
600
800
1,000
1,200
1,400
Wells Sand Resin-coated Sand Ceramic
Freq
uenc
y of
Pro
ppan
t Usa
ge (%
of W
ells)
Sam
ple
Size
(Wel
ls)
Source: PacWest analysis; PacWest FracDB / FracFocus.org
Sand is proppant of choice, used in 97% of wells
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 20
Frac sand demand is expected to grow steadily in North America; does not even consider emerging international demand
Frac Sand Demand ForecastFrac Sand Demand Outlook Discussion
■Sand supply and demand have balanced out in the last 6 months as significant new frac sand capacity has hit the market
■Primary constraint in NAM frac sand is no longer the sourcing / mining, but the logistics operation
■Single frac may require as many as 25 railcars of frac sand, making the logistics of getting sand from mine to well a logistics challenge
Source: PacWest Analysis
2012 2013 2014 2015 2016 2017 20180
20
40
60
80
100
120
140
Other Grades 40/70 30/50 20/40
Million Tons
5260
69
80
94
109
127CAGR (2012-2018) = 16.0%
Lots of sand capacity in NAM, but where will Argentina frac sand come from??
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 21
Forecast
Guar prices spiked over 2011-2012 due to seedstock constraints and rapidly increasing demand, resulting in price spikes
Guar Gum Supply/Demand
Guar Gum Supply vs. Demand Discussion■ Wholesale prices for oilfield
guar have climbed to nearly $25/kg over the last year, from a typical historical price of $1.50/kg
■ High wholesale prices have stressed the margins of pressure pumpers
■ There has been much speculation of a shortage of guar gum in the summer but there have been no reports yet of a shortage in the field
■ Based on recent PacWest work in India to assess guar supply market, probability of a guar shortage in the next six months is highNote: Capacity represents end-of-year capacity, not average capacity
Source: PacWest Analysis
‘000 Tons
-
100
200
300
400
500
600
700
800
900
1,000
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$6,000
$3,250
$8,500 $10,250
$15,750
$9,250
Supply DemandEstimated Avg. Prices
2008 2009 2010 2011 2012 2013 2014 2015 2016
$/Ton
Prices are FOB Mundra
Price spike!!
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 22
Guar price increases forced NAM pressure pumper costs to double to nearly $1 billion during 2012 Q2
US Total Guar Consumption by Pressure Pumper
Estimated 2012 Q1 vs. Q2 Guar Costs Discussion■ Guar costs increased an
estimated 95% from 2012 Q1 to 2012 Q2- Due to both price increases and
larger purchases
■ Pressure pumpers spent an estimated $478 million on guar to support 2012 Q1 US oilfield activity- Based on an estimated average
2012 Q1 price of $11,000 per ton for oilfield grade guar powder
Source: PacWest Analysis
Halliburto
nBHI
Schlumberg
erFT
S
Weath
erford
Pumpco
Superior
Calfrac
Trican
C&J
Universal
CuddSanjel
Other
$-
$50
$100
$150
$200
$250
$300
2012 Q12012 Q2
Mill
ion
$
Q1 Total = $478 millionQ2 Total = $930 million
95% increase
Major cost impact QoQ
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 23
Rapid growth of hydraulic fracturing activity has driven significant increases in the use of water in the oilfieldFrac Water Demand: Demand & Flowback
Source: PacWest analysis; PacWest FracDB / FracFocus.org; Newfield Exploration
Hydraulic Fracturing Water Demand■ In 2011, the average unconventional/shale frac in the US consumed
65,000 barrels of water (2.7 million gallons)
Flowback■ Water that flows back within 15-
45 days after a frac job is called “frac flowback”
■ Average of 10-35% of the total water pumped downhole flows back during the flowback period- Average of 7,000-23,000
barrels of water (0.3-1.0 million gallons)
- Some areas (Mississippi Lime) flowing back nearly 100%!!
■ Flowback water is handled in one of several ways:- Disposal via injection well- Treatment and re-use for
other frac jobs- Evaporation via ponds (largely
restricted to Rocky Mountain region)
That’s a lot of water!!
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 24
Water Constraints
Many areas face constraints for water sourcing and disposal, adding costs to operations and, at times, halting operations
Source: PacWest Analysis; Conestoga-Rovers & Associates; WorleyParsons; additional expert interviews with operators and service providers
Region/Basin Constraints Drivers
Marcellus
Bakken
Barnett
DJ Basin
Eagle Ford
Fayetteville
Haynesville
Permian
San Juan
Granite Wash
Lack of Disposal Wells, Regulatory Pressure
Water Quality, Infrastructure Constraints
Water Scarcity
Water Scarcity, Regulatory Pressure
Water Scarcity, Infrastructure Constraints
Lack of Disposal Wells
Water Scarcity, Lack of Disposal Wells
Water Scarcity
Regulatory Pressure, Water Scarcity
Water Scarcity
HLLegend:
Constraints are driving increased water treatment/reuse; environmentally positive, but costs $$
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 25
Shortage of oilfield labor has constrained service capacity in North America; labor availability even more limited internationallySupply Chain Constraints: Labor
■Shortage of oilfield labor is the primary constraint to deploying new frac fleets
■Shortage of labor to staff up drilling rigs is also the key constraint holding back the rig count
■Labor shortage is particularly acute in the Permian and Bakken plays, where between 40% and 50% of oilfield labor travels from other areas
■Average experience of deployed oilfield personnel has decreased dramatically over the last two years as service providers have hired anyone available
■Arguably the MOST difficult to address, particularly given the industry-wide challenge of experienced staff retiring over coming years
Potentially hardest problem to address!!
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 26
Infrastructure constraints are often at the root of supply chain constraints; fracs require massive volumes of material inputsCritical Infrastructure Constraints & Risks
Rail Capacity Takeaway Capacity■ Siting and constructing new
pipeline capacity for hydrocarbon ‘takeaway’ requires 2+ years
■ Prior to development of pipeline capacity, rail is the preferred method to transport hydrocarbon- Use of rail for takeaway
exacerbates frac consumable transport
■ Trucks are easiest, but most expensive transport method!!
Storage■ Storage capacity is a critical
infrastructure component that helps service companies manage equipment and consumables
■ Proper storage facilities are critical to maintain quality of high-grade frac sand and other completion chemicals
■ Limited storage infrastructure has led to shortages of critical materials that were not available for delivery to wellsite for frac
■ Fracturing a well requires large volumes of consumables, particularly sand and chemicals- Typical Bakken well
requires 15 railcars of sand
■ Rail is generally the only cost-effective method to transport these materials to a region
■ Transloading facilities and railcar capacity are common capacity constraints
Neuquen benefits from existing infrastructure, though investments will be required as activity increases
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 27
Agenda
1) About PacWest
2) North American Market Update
3) Supply Chain & Infrastructure Constraints
4) International Unconventional Development
5) US Analogue: Bakken
6) Questions
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 28
The EIA’s 2011 study of shale gas resources sized up resources across 14 regions outside the US
Global Shale Resources
Source: EIA, World Shale Gas Resources Report
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 29
A 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
China
USA
Argentina
Mexico
S Africa
Canada
Libya
Algeria
Brazil
Poland
France
India
- 200 400 600 800 1,000 1,200 1,400
1,275
862
774
681
485
388
290
231
226
187
180
63
2010 2015 2020 2025 2030 2035 20400
10
20
30
40
50
60
70
IndiaFrancePolandBrazilAlgeriaLibyaCanadaMexicoArgentinaUSAChina
Global Shale Resource Estimates (bcf) Gas Production Forecasts (tcf)
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 30
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.
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 31
2011 2012 2013 2014 2015 20160
1
2
3
4
5
6
2.4 2.5
3.2
4.0
4.8
5.6
International frac capacity is forecast to grow 133% over the five years to 2016 to a total of 5.6 million HHPInternational Frac Capacity Growth Forecast
2011-2016 International Frac Capacity Discussion■ International capacity is generally
manufactured in NAM- China is exception; bulk of capacity
likely manufactured in-country
■ Russia is currently the largest int’l frac market; expected to maintain that lead with healthy growth
■ Australia capacity demand is growing and it is forecast to experience the largest growth rate
■ Offshore market will likely see steady stim vessel demand growth
■ China will see strong growth, though much of its demand could be satisfied internally
■ Argentina activity will likely increase driving capacity demand
■ Mexico and Middle East/North Africa likely see frac demand as wellNotes: Internationally deployed frac equipment is generally built and produced in NAM
Source: PacWest Analysis
Frac
Cap
acity
(MM
HH
P)
Russia
MexicoMENA
Poland
Argentina
China
Offshore
Australia
Other 100%233%300%150%
60%
167%
52%
700%
114%
Region5-Year
Growth
5-Year International Growth = 133%
International capacity is forecast to more than double!
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 32
Argentina has made steady progress on unconventional resources and has drilled/completed more shale wells than any region outside NAM
Argentina Activity & Supply Chain Update
■More than 125 unconventional wells expected to be drilled and completed by 2012 end-of-year (25 in 2011, 100 in 2012)- Mostly small (3-5 stages) vertical wells, several multi-stage horizontal- Multi-stage horizontal wells extremely expensive: $24 million for the 1st (Apache)- YPF leading development activities, accompanied by multiple NAM E&Ps
■Major service centers already established and service companies are steadily adding fracturing equipment/capacity- ~15 rigs active in-country (H&P, Nabors, others); ~2 rigs per frac crew- Estimated 190,000 HHP (8 fleets) in-country – additional deployments planned??- Schlumberger, Halliburton, Baker Hughes, Calfrac, San Antonio, Weatherford –
others??■Infrastructure sufficient to support early-stage activity
- Established oil and gas pipeline network- Capacity available within existing network, including export capacity
■Experienced oilfield labor; augmented by NAM staff with hands-on shale experienceStrong candidate to be one of the first major unconventional resource
basins to be developed outside of NAM
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 33
Poland was once the primary focus for international shale efforts, but slow progress has dimmed optimism
Poland Activity & Supply Chain Update
■More than 50 unconventional wells drilled by 2012 end-of-year (10 in 2011, 40+ in 2012)- Only 6-8 of ~25 wells to date were horizontal, only 4 wells completed- Mixed results, with multiple wells drilled by key operators (i.e. PGNiG, Marathon,
BNK, Orlen) with gas shows from multiple wells- Exploration programs on-going with many more wells to drill under concessions- ExxonMobil pull out was blow to optimism , though geopolitics had bigger role
■Leading service companies have set up bases and/or partnerships to operate in-country- Schlumberger, Halliburton, Baker Hughes all have bases established; Weatherford - Schlumberger completed 13-stage frac for 3Legs Resources, largest to date- Capital beginning to flow to develop domestic supply chain: United Oil Services
■Infrastructure limited and may potentially slow development efforts- Logistics/ transportation issues already emerging
■Extremely small domestic E&P industry means that nearly all labor imported
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 34
Australia has made meaningful progress on CBM, just starting with shale; supply chain constraints already emerging
Australia Activity & Supply Chain Update
■Strong geology, economic incentives, regulatory framework■More than 1,000 CBM wells drilled to date, though far short of 3,000-well target; shale
development just beginning- Significant stakeholder issues with CBM, particularly focused on water, has halted
some activities- Numerous domestic and international operators participating- First multi-stage horizontal shale well just completed; Cooper Basin, Beetaloo,
Kidson, Perth, and Eromanga sub-basins are targets of activities- D&C costs for shale well likely in excess of $20 million
■Significant supply chain bottlenecks emerging across multiple products/ services – need for greater supply chain support- Both rigs and fracturing equipment scarce- Less than 100,000 HHP of fracturing capacity currently in-country; far more needed- Halliburton, Baker Hughes, Schlumberger, Trican operating- Water sourcing for fracturing will present challenges
■Infrastructure availability inland poses challenges■Oilfield labor available due to major offshore projects, but Australia labor is expensive
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 35
There have been some recent roadblocks to shale production in select countries around the world
Global Shale Progress
Source: EIA, World Shale Gas Resources Report
■ Canada: Quebec put temporary moratorium in place
■ France: Shale moratorium in place, halting exploration activity in the highly promising oil-bearing Paris Basin
■ 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 2013
■ South Africa: Temporary moratorium in place pending assessment of environmental impact report; multiple delays
■ EU: Considering stricter shale guidelines to the protests of Poland
■ Bulgaria: frac moratorium in place, though politicians already reconsidering hasty decision
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 36
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
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 37
Agenda
1) About PacWest
2) North American Market Update
3) Supply Chain & Infrastructure Constraints
4) International Unconventional Development
5) US Analogue: Bakken
6) Questions
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 38
The US Bakken play has boomed over the last three 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
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 39
Since late-2009, the rig count has increased 2-3x, with counts forecast to remain above 200 rigs
0
20
40
60
80
100
120
140
160
180
200
Directional/Horizontal
Vertical
Bakken Rig Count & Forecast
Rig Count – Dir/Hor vs. Vertical Average Rig Count ForecastLand Rigs Land Rigs
2011 2012 2013 20140
50
100
150
200
250
180200 210 220
Source: PacWest Analysis; Macquarie; Baker Hughes
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 40
Overwhelming demand in the Bakken led to a significant under-supply of pressure pumping capacity in 2011
15 20 25 300%
50%
100%
150%
200%
250%
100%133%
166%
199%21%
28%
35%
42%2011 completions + backlog
2011 completions
Average Stages per Well
Pres
sure
Pum
ping
Cap
acit
y U
tiliz
ation
121%
161%
201%
241%
Sensitivity Analysis of 2011 Bakken Pressure Pumping Capacity Utilization
Sources: CIBC World Markets; Macquarie; PacWest analysis
100% utilization of
2011 capacity
The Bakken will be 61% under-supplied in 2011, conservatively assuming 20 stages/well
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 41
30% 40% 50% 60%0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
114% 109% 104%100%
45% 43% 42% 40%
2012 completions + backlog2012 completions
Capacity Growth (2011 – 2012)
Pres
sure
Pum
ping
Cap
acit
y U
tiliz
ation
159% 152% 146% 140%
Sensitivity Analysis of 2012 Bakken Pressure Pumping Capacity Utilization
100% utilization of 2012
capacity
Source: CIBC World Markets; Macquarie; PacWest analysis
For approximately two years, demand for pressure pumping capacity outpaced supply
Note: Sensitivity analysis assumes an average of 20 frac stages / well in 2012, a conservative estimate
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 42
Staffing experienced crew has been a critical challenge faced by pressure pumping service providers, particularly in the Bakken
■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
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 43
Supply chain constraints held 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
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 44
Bakken pressure pumping supply was unable to keep pace with demand resulting in a significant well completion backlog
Mar-0
9
Apr-09
May-0
9Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-1
0
Apr-10
May-1
0Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-110
60
120
180
9067
85 7650
87 7296
5781 67
8280 81
10399 95 98 103 107
93118
172
Day
s be
twee
n W
ell
Spud
and
Com
pleti
on
Uncompleted Drilling Permitted
North Dakota 372 156 346
Montana 57 6 67
Bakken 429 162 413
50150250350450
Num
ber o
f Wel
ls
Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis
Days Required for D&C in North Dakota
Bakken Well Count (May 2011)
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 45
Operator D&C performance varied, in some cases depending onsupply chain sourcing and contracting practices
Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis
Oasis Petroleum
Marathon
EOG Resources
Newfield
Slawson
Hess
ConocoPhillips
Brigham Oil & Gas
Zenergy
Whiting Oil & Gas
Continental Resources
Anschutz/OXY
0 1 2 3 4 5
4.53.6
3.43.0
2.82.7
2.62.4
2.01.9
1.81.0
Bakken Ratio of Uncompleted Wells to Active Rigs (May 2011)
7
45
29
12
17
13
48
17
15
34
25
27
Well Backlog
7
25
15
6
7
5
18
6
5
10
7
6
Rigs
Note: Well backlog is best estimate based on data from Montana and North Dakota oil/gas regulators; rig count is from April 2011
Backlog was result of frac equipment shortages
IAPG CONGRESO PRESENTATION
© PacWest 2011 | All rights reserved | 46
Agenda
1) Introduction
2) North American Market Update
3) Supply Chain & Infrastructure Constraints
4) International Unconventional Development
5) US Analogue: Bakken
6) Questions
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