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Peter Goldscheider

Managing Partner

Prague, September 11, 2013

Shale gas – Prospects, Challenges, Reality and Hopes

EPIC – Financial Advisory House

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IN CENTRAL AND SOUTH EAST EUROPE, UKRAINE, RUSSIA, TURKEY AND UAE

Shale Gas Production History

With a very mature

mining industry and

following intense

investment into mining

technologies, the USA

is the only country

worldwide having real

experience with shale

gas production

The shale boom in the

USA has benefited

from favorable

regulations and

geology

WORLD SHALE GAS EXPERIENCE IS CONCENTRATED IN THE USA

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First gas production from shale formations already in 1821 (Fredonia, New York),

but large-scale development was technically and economically not feasible

Large-scale shale gas production started in the Barnett Shale, Texas in the 1980s,

while profitability was achieved only by 2006, thanks to advances in drilling

technologies* (development of which was supported by US government R&D

funding) and higher gas prices

Success in the Barnett Shale led to rapid expansion into other formations, including

the Haynesville, Marcellus, and

Fayetteville shales

Increased gas production and

falling gas price raised usage

of gas in transportation and

electricity generation with gas

substituting mainly coal

As a result, the US

experienced record coal

exports, mainly to Europe and

Asia

2012 first US shale gas exports

US Shale Gas Production by Play, 2000-2012

Source of chart data: DI Desktop/HPDI database, widely used in industry and government (as of May, 2012)

* Mainly of hydraulic fracturing combined with horizontal drilling of wells

Experience from the US

Since 2005 US gas

production has been

on the rise; in recent

years mainly due to

shale gas boom ,which

resulted in gas spot

prices falling below $2

per thousand cubic feet

(€ 55 per thousand

cubic meters) in early

2012

However, the US price

development following

the shale boom is not

likely to repeat

elsewhere

GAS AVAILABILITY PUSHED PRICES DOWN

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US Dry Natural Gas Production, 2001- May 2013 (Bcf)

US Natural Gas Prices ($ per ths cubic feet)

Residential price

Henry Hub spot price

Source: EIA, NYSE

1,200

1,400

1,600

1,800

2,000

2,200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

5

10

15

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$1.95

Experience from the US – Production Characteristics

A large variability in

shale gas well

productivity has been

experienced in the US,

where the gas from

wells in ‘sweet spots’

far exceed the average

recovery from wells

across the play area

Currently, 36% of US

shale gas production

record declining well

quality and 34% of

sites show flat

production

NON-SWEET SPOTS > 80% OF THE AREA

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Discovery of shale gas was followed by

lease agreements frenzy

Lease agreements called for production

results » drilling boom

At first, sweet spots were looked for and

drilled, resulting in an initial rapid

production hike

After production moves to other than

sweet-spots areas, production weakens

dramatically and large capital inflows

(for drilling of new wells) are needed to

offset the decline

Production from new wells is much less

economical and soon may even become

loss making (depending on gas price)

Individual well decline rates are high,

ranging from 79%-95% after 36 months

Average well quality has fallen nearly 20%

in Haynesville (the most productive shale

gas play in the US); Haynesville became

middle aged after just 5 years

Haynesville Gas Production and Number of Operating Wells, 2007-2012

Haynesville Annual Production per New Wells

Chart data source: Drilling info published on DI Desktop/HPDI (March 2013)

Experience from the US – Our Lessons

The shale gas surge in

the US has had an

enormous economic

impact worldwide

The ecological impact

has largely been

ignored

THE SHALE GAS REVOLUTION IS NOT AS SIMPLE AS IT SEEMS

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Hydraulic fracturing technologies enabled extraction of formerly inaccessible

hydrocarbons

The drilling boom was partly motivated by:

“held-by-production” arrangements in 3 to 5 year lease agreements

requirements of joint venture arrangements

the need to book reserves to support share valuation on the stock

markets

‘ Shale gas bubble’ was created with worldwide impact

Ecological concerns connected with shale gas production:

Requirement of high water consumption (questions of water source,

treatment, disposal…)

Danger of groundwater contamination – by fracturing fluids or released

gases

Greenhouse gas emissions – caused by methane leaks from wells,

emissions from the diesel- or natural gas-powered equipment

(compressors, drilling rigs, pumps etc.), transportation of necessary

water volume for hydraulic fracturing (if done by truck)

Risk of induced seismicity

Experience from the US

It seems that Wall

Street investment

bankers helped to

create natural gas

oversupply resulting in

record low US gas spot

prices

SHALE BOOM SHOWS STRONG SIMILARITIES TO THE MORTGAGE BUBBLE

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US shale production is connected with huge amounts of debts

The need to meet production targets for share appreciation and to provide cash

flow to support operators’ debt exposure caused severe overproduction and

subsequently drove gas prices to historic lows in 2011, diminishing the already

very low margins

As a reaction, larger players in the industry began to spin of their troubled shale

assets leading shortly thereafter to massive write-downs in shale assets

Besides recommending shale gas securities, investment bankers were

instrumental in creating complex financial products such as VPP's (volumetric

production payments) sold to investors such as pension funds. Further, leases

were bundled to unproved shale reserves (similarly as mortgage-backed securities had

been bundled and sold on questionable underlying mortgage assets prior to the economic

downturn of 2007)*

History of shale M&A bubble: the number of shale M&A deals began to explode in

2009 with many foreign investors such as Chinese, Korean, French and

Norwegian companies interested in the U.S. shale assets. By Q2-Q3 2012, serious

shale asset write-downs began and foreign companies started pulling out

Recently, the USA started exporting shale gas – thanks to a very lucrative price

spread, export is seen as the best way to recovering production losses

In October 2011, the first shale gas export permit was issued to Cheniere Energy. A year

later, the number of permits had grown to 18 and the percentage of shale gas committed for

export had grown significantly, accounting for approximately 60% of current US consumption

* For more details see: http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf

Global Trends and Estimated Development

Gas prices have been

very volatile in the past

and the difference

between American,

European and Asian

prices has further

widened

NATURAL GAS PRICES STRONGLY INFLUENCE VARIOUS MARKETS‘ DEVELOPMENT

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0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Indonesian Liquefied Natural Gas in Japan

Russian Natural Gas border price in Germany

Natural Gas spot price at the Henry Hub terminal, US

Natural Gas Prices Comparison, Jan 2000 - July 2013 ($ / MMBtu)

291 € / ths m3

385 € / ths m3

Source: IMF

Will Shale Gas Mean Revolution in Europe?

European shale gas

is not likely to be

exploited in a short-

term horizon since

too many parameters

are still unclear .

Thus, the economic

impact cannot be

projected yet .

CONCLUSION

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“Natural gas from shale has the potential to transform the [...] energy market and boost

the economy, create thousands of jobs, generate significant tax revenues and reduce

our reliance on imported gas,” declared the CEO of a major gas company. Can this

become true for Europe? The answer is “most likely NO”. Why?

Europe’s shale gas industry is in its infancy – with no production testing (only few

exploratory wells drilled) and thus no reliable indicators of potential productivity

Europeans are more environmentally sensitive, many countries banned hydraulic

fracturing for that reason (France and Germany)

The sparsely populated wilds of North Dakota used to drilling for nearly centuries

simply don’t exist in the EU. Drilling tens of thousands of shale gas wells in any of

the EU country might be a different challenge than it is in the US

Existence of an alternative in renewables industry being proven and real and on its

way to being a cheaper way to generate grid power than the fossil-fueled

alternatives by the end of this decade

Economic parameters – connected with extreme initial (geological survey, test

drillings), production and ecological (low in the US due to benevolent legislation)

costs, but provides for profitable production for only a few years

Thank you for your attention!

September 11, 2013 ▪ www.epicinvest.com

EPIC Financial Consulting

Headquarters Vienna

Plösslgasse 8

1040 Vienna, Austria

Tel: +43 1 501 19 0

Fax: +43 1 501 19 9

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