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, e.g., energy, pharmaceuticals,
telecommunications, healthcare, insurance, banking
Who is McKinsey & Company?
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; McKinsey Global Institute (MGI)
% CAGR, %,
2012-2025
1.1
1.5
0.5
Reference case
▪ Continuation of current trends
(econ. growth, technological
progress, GHG regulation)
▪ Avg. GDP growth rate: 3.2%
Global growth renewed
▪ Continued growth in emerging
markets fueled by China
▪ Avg. GDP growth rate: 4.0%
Global lost decade
▪ Major emerging markets are
unable to insulate themselves
against the slowdown in global
growth
▪ Avg. GDP growth rate: 2.3%
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
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
OECD
E Europe/Eurasia
Non-OECD Asia
Middle East
Row
2020 2010 2035
2.1
2.3
4.5
1.1
1.8
2010-2035
CAGR
0.9
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%
1.6%
40%
0
20
40
60
80
100
02 03 05 04 06 2000 01
Conventional oil
US Light Tight Oil
07 08 09 10 11 12
0
1
2
3
4
10 11 12 07 08 01 2000 05 04 09 06 02 03
US shale gas
Other gas1
98%
2%
0.9%
61%
SOURCE: 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
37
63
28
47
25
7,4601,4169,183
Mar-13Increase
in LTO
Conventional
prod. + de-
mand trends
307
Mar-11
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Other US LTO Plays
Mississippi Lime
Woodford
Niobrara
Bone Spring
Austin Chalk
Sprayberry
Granite Wash
Bakken
Eagleford
Made by Energy Insights. Released October 2013.
LTO
Other
1 L48 = Lower 48 states (excludes Alaska & GoM)
L481 US
100% = 5.4 MMb/d 100% = 7.2 MMb/d
Proportion of US crude oil production
Percent of Mar. 2013 prod
Comments
Kbd
2000 02 04 06 08 10
U.S. 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: Google Earth
Image 2.9 km x 1.6 km, taken from 2500 m eye elevation
McKinsey & Company | 14
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
2020201520102005
High LTO resource
Constant activity
Constrained resource
Constrained resource
& activity
Made by Energy Insights. Released October 2013.
McKinsey’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
7.8
3.9
6.8
5.3
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
9.1
-3.5
6.5
3.3 -16.6
-4.6 4.4
1.3
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: 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
60
40
20
0
10595908580757065605550454035302520151050
West A
fric
a D
W N
ew
Canada O
il sands N
ew
West A
fric
a D
W E
xis
ting
U.S
. LT
O N
ew
U.S
. LT
O E
xis
ting
Bra
zil
DW
New
U.S
. G
oM
DW
New
Canada O
il sands E
xis
ting
U.S
. G
oM
DW
Exis
ting
Saudi A
rabia
New
Iraq N
ew
Venezuela
Exis
ting
Saudi A
rabia
Exis
ting
Iraq E
xis
ting
Oth
er
liquid
s3
100
80
100
Venezuela
New
OPEC spare capacityNon-crude
Made by Energy Insights exclusively for LBS. Released September 2013.
OPEC1,3 Non-OPEC2
Bra
zil
DW
Exis
ting
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?
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)
9
9
13
13
18
26
27
32
58
75
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?
▪ 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 Gas.com; 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-
Neal Haynesville/
Bossier
(251)
Woodford
Caney
Barnett
(118)
Eagle Ford / Pearsall
(>100)
Woodford
(42)
Avalon
Bend
Pierre Lewis
Hermosa
Mancos
Hilliard-
Baxter-
Mancos
Antrim
New
Albany
Utica
Horn River Shale (40)
Montney (152)
Bakken
Granite
Wash
928 963
109
163 159190
202
202 20235 1,211
CBM
2,310
2008 2011
616
Shale
Gas
1,122
2007
1,093
2,074
827
35
1,309 Tight
Gas
58
Conven-
tional
2003
L48 gas resources
Tcf
Orange: considered to have
large amounts of liquids
Exploration
Developing
Producing (Tcf resources)
Fayetteville (20)
xx Resource to production
ratio (years)
54 57 89 94
McKinsey & Company | 22 22
Development of Barnett shale wells during 1997-2010
SOURCE: EIA
McKinsey & Company | 23
Drilling between the runways at Dallas-Fort Worth airport! Well pads
SOURCE: Google Earth
McKinsey & Company | 24
As shale gas production has grown US gas prices have collapsed
SOURCE: EIA
$/MMBtu
0
1
2
3
4
5
6
7
8
9
10
0
50
100
150
200
250
03 04 05 06 07 08 09 10 11 12 2013 2000 01 02
BCMa
Henry Hub Gas price
(LHS)
US shale gas production
(RHS)
McKinsey & Company | 25
Low US gas prices provide > $500 million daily benefit to the US economy
2.76
11.13
8.86
2012 Henry Hub 2012 German
Border
2008 Henry Hub
SOURCE: EIA, CME
Henry Hub Gas Price
$/MMBtu
$500-650MM
per day
McKinsey & Company | 26
8
39
27
-9
25
59
19
15
LDC’s
US Onshore Independents
G&P MLP’s
Chemicals
Power Merchants
Service Companies
Majors
Gas Pipelines
The biggest benefits from shale have gone to midstreamers and energy
users while the Majors and power utilities have suffered
SOURCE: Press searches, McKinsey analysis
“Peter Voser said the failure
of Royal Dutch Shell's huge
bet on US shale was the
biggest regret of his time as
chief executive of the
company.”
– FT, 6 October 2013
Total Return to Shareholders across the NA gas value chain
Percent
1 Service companies (SLB, HAL, WFT, BHI); majors (BP, RDS, XOM, CVX); US onshore independents (XTO, UPL, SWN, RRC, QEP, PXD, NBL, NFX,
MRO, XCO, APC, APA, EQT, EOG, DVN, CLR, XEC, CHK, CRZO, COG); G&P MLP (CPNO, CMLP, DPM, EROC, MWE, NGLS, RGNC, WES); gas
pipelines (BWP, EPB, SEP); power merchants (CPN, GEN, DYN); LDCs (CNP, OGE, SCG, NFG, OKE, STR); chemicals (WLK, DOW, PPG)
2 Till Nov 2012
Industry segment1 2009-20122
Shale writedowns 2012-3
$1.7bn $2.8bn
$1.3bn $2.1bn
McKinsey & Company | 27
Will shale gas also shake up markets outside the North America?
SOURCE: Financial Times; EIA (June 2013)
Shale gas technically recoverable
resources
South Africa
Brazil 245
Russia 285
390
Australia 437
Mexico 545
Canada 573
United States 665
Algeria 707
Argentina 802
China 1,115
Top 10 countries, Tcf
McKinsey & Company | 28 SOURCE: Expert interviews; McKinsey Analysis
Exploration for unconventional gas outside North America is at an early
stage of development
Price per acre
‘Commercial pilot’ ‘Development’ ‘Consolidation’ ‘De-risking’
‘Land
acquisition’
50-100 wells
per basin
1,000 + wells
per basin
<10 wells per
basin
Position based on most advanced basins
McKinsey & Company | 29 29
Most countries have has access to only a tiny fraction of the well data
available in the US
1 Estimate assumes 1500 active Chinese rigs in 2012 and rig count growth equal to oil and gas production growth
SOURCE: Baker Hughes; McKinsey analysis
Estimated well density
Wells per 1000 Square KM
Algeria Argentina China1 US
15x 8x
1.5x
Europe
Wells drilled 1983-2012 Wells drilled
1973-2002
McKinsey & Company | 30
Learning effects mean that a large capital commitment is required to take a
basin from shale discovery to commercial production
Production costs USD per MMBtu
Number of wells
1,000 800 600 400 200 0 100 300 500 700 900
SOURCE: HPDI; Team Analysis
McKinsey & Company | 31
Shale development requires a lot of infrastructure
SOURCE: Google Earth, all taken at 2500 km eye height (approx 2 x 1.8 km)
McKinsey & Company | 32
Is there another way for shale to transform international gas markets?
SOURCE: FERC Office of Energy Projects; As of September 12 2013; LNG World
McKinsey & Company | 33
400
Ø 12.2
CapacityMTPA
15
5
10
20
0
26024022020018016014012010060 8020
Others AustraliaRussia
AfricaAsia
North American LNG exports can reduce the need for high cost Australian
and Russian supplies, pushing down break even LNG prices
SOURCE: Energy Insights
Global LNG cost curve excluding North America and existing/under development projects
US$/mmbtu, post tax
Capacity
needed with
no NA LNG
Capacity
needed with
base case
NA LNG
(~70MTPA)
Capacity
needed with
high case
NA LNG
(~130MTPA)
McKinsey & Company | 34
Summary for unconventional gas … and some more questions
SOURCE: McKinsey
▪ Shale gas has
transformed the North
American market
▪ There is a large
potential for shale
development outside
North America but we
expect it to progress
slowly
▪ North American exports
of (shale) gas could
have a much bigger
impact on global gas
markets over the next
decade
▪ Geoscience: How quickly can the industry build its
understanding of shale resources outside North
America?
▪ Technology: Will technology allow shale
development on a significantly smaller footprint at
acceptable costs?
▪ Public opinion: Can the public be convinced that
the benefits from shale gas production outweigh
the risks (real or perceived)?
▪ Regulation: Will government and industry find a
reasonable balance between the need for public
reassurance and commercial realities?
▪ Markets: How great an incentive will the market
provide to invest in developing shale gas
Signposts to watch Summary
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