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© 2014 BAKER HUGHES INCORPORATED. ALL RIGHTS RESERVED. TERMS AND CONDITIONS OF USE: BY ACCEPTING THIS DOCUMENT, THE RECIPIENT AGREES THAT THE DOCUMENT TOGETHER WITH ALL INFORMATION INCLUDED THEREIN IS THE

CONFIDENTIAL AND PROPRIETARY PROPERTY OF BAKER HUGHES INCORPORATED AND INCLUDES VALUABLE TRADE SECRETS AND/OR PROPRIETARY INF ORMATION OF BAKER HUGHES (COLLECTIVELY " INFORMATION"). BAKER HUGHES RETAINS ALL RIGHTS

UNDER COPYRIGHT LAWS AND TRADE SECRET LAWS OF THE UNITED STATES OF AMERICA AND OTHER COUNTRIES. THE RECIPIENT FURTHER AGREES TH AT THE DOCUMENT MAY NOT BE DISTRIBUTED, TRANSMITTED, COPIED OR REPRODUCED IN WHOLE OR

IN PART BY ANY MEANS, ELECTRONIC, MECHANICAL, OR OTHERWISE, WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF BAKER HUGHES, AND MA Y NOT BE USED DIRECTLY OR INDIRECTLY IN ANY WAY DETRIMENTAL TO BAKER HUGHES’ INTEREST.

International Shale Development:

Prospects and Challenges 37th IAEE/USAEE International Conference

June 17, 2014 ◆ New York City

Surya Rajan Director, Market Strategy – Baker Hughes Incorporated

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© 2014 BAKER HUGHES INCORPORATED. ALL RIGHTS RESERVED. TERMS AND CONDITIONS OF USE: BY ACCEPTING THIS

DOCUMENT, THE RECIPIENT AGREES THAT THE DOCUMENT TOGETHER WITH ALL INFORMATION INCLUDED THEREIN IS THE

CONFIDENTIAL AND PROPRIETARY PROPERTY OF BAKER HUGHES INCORPORATED AND INCLUDES VALUABLE TRADE SECRETS

AND/OR PROPRIETARY INFORMATION OF BAKER HUGHES (COLLECTIVELY "INFORMATION"). BAKER HUGHES RETAINS ALL RIGHTS

UNDER COPYRIGHT LAWS AND TRADE SECRET LAWS OF THE UNITED STATES OF AMERICA AND OTHER COUNTRIES. THE RECIPIENT

FURTHER AGREES THAT THE DOCUMENT MAY NOT BE DISTRIBUTED, TRANSMITTED, COPIED OR REPRODUCED IN WHOLE OR IN PART

BY ANY MEANS, ELECTRONIC, MECHANICAL, OR OTHERWISE, WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF BAKER HUGHES,

AND MAY NOT BE USED DIRECTLY OR INDIRECTLY IN ANY WAY DETRIMENTAL TO BAKER HUGHES’ INTEREST.

LEGAL DISCLAIMER

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Outline

￭ North America’s shale revolution – a recap

￭ Exporting the North American shale gas experience

￭ The international playing field and key prospects

￭ Conclusions

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NORTH AMERICA’S SHALE REVOLUTION

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Unlocking Unconventional Resources in the U.S.

1950s 1960s 1970s 1980s 1990s 2000s

A bazooka projectile,

invented as a part of a

secret US army program,

is applied to oil fields

George Mitchell first begins

frac stimulation on

compressed rock in Wise

County, Barnett; other

companies resist because it

is expensive and time

consuming

Mitchell still

struggles

with frac

fluid formula

Oryx Energy begins to

apply horizontal

drilling to Bakken,

Niobrara, and other

Texas fields (although

Barnett was not brittle

enough); horizontal

can only be used a

few thousand feet

New slick-water

frac fluid recipe

changes

everything

3D seismic makes it

easier to find faults

while diamond studded

drill bits make drilling

through layers above

shale faster

Devon and Hallwood

Energy first to

combine horizontal

drilling and frac

stimulation

Barnett becomes a

“world class reservoir”

and model for shale

formations around the

country

Energy prices

plummet to

$15/Bbl

($30/bbl

today)

Barnett sweet

spot begins to

run dry

Companies today continue to experiment with technology through longer laterals, varying levels

of proppant, well spacing, and multi pad drilling to optimize production

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Barnett Shale Developed with Independents Taking the Lead

1980s:

￭ Oil majors generally focused abroad and were biased against

domestic drilling

￭ Independents meanwhile experimented with new technologies in

the U.S.

￭ Majors had talented geologists, but technology enabled all

players to compete in land grabs

￭ Decades of perseverance and favourable price environments

allowed Devon to “crack the code”

The Barnett

Shale Play

￭ Barnett slowly evolved from vertical to horizontal

drilling; estimated Ultimate Recoverable (EUR) per

well increased more than 6x over the past decade

￭ Key Barnett Players include large independents such

as Devon, Chesapeake, Encana, EOG, XTO,

Quicksilver, Range Resources

Source: US Energy Information Administration based on Drilling Info (formerly HPDI)

Source: Oil & Gas Journal

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U.S. Shale Gas Production Takes Off Across a Number of Plays

Source: LCI Energy Insight gross withdrawal estimates as of March 2013 and converted to dry production estimates with EIA-calculated average gross-to-dry shrinkage factors by state and/or shale play

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Shale Gas Will Account for Half of Natural Gas Output by 2040

Source: US Energy Information Administration, Annual Energy Outlook 2014 Early Release

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U.S. Tight Oil Production Takes Off as Oil Prices Rise

$-

$20

$40

$60

$80

$100

$120

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

U.S. Tight Liquids Production (Mbbl/day) vis-à-vis Commodity Prices ($/Boe)

Eagle Ford

Bakken

Spraberry

Wolfcamp/Bone Spring

Niobrara

Granite Wash

Mississippian Lime

Anadarko

Other

Utica

Woodford

Barnett

Monterey

Nymex Nat Gas (Boe 6:1)

Nymex WTI Oil

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Supply Revival and Economic Impact of the U.S. Oil and Gas

Revolution is Substantial

Jobs 2.1 million 3.3 million

Tax Revenue $75B $125B

GDP $283B $468B

2012 2020

Disposable Income $1,200 $2,700

Capex $121B $189B

￭ Not just oil and gas: associated industries such as petrochemical and manufacturing have been booming

￭ As natural gas has replaced coal in electricity generation, US CO2 emissions declined to their lowest levels

in 20 years, the largest reduction of all countries

Source: IHS America’s New Energy Future: The Unconventional Oil & Gas Revolution and the US Economy, Volume 3

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EXPORTING THE NORTH AMERICAN

SHALE GAS EXPERIENCE

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Above Ground and Subsurface Factors Must be in Place to

Achieve Commercial Success • Motivated industry + government in the face of dwindling domestic supplies

• A favorable price environment Prices & Market Fundamentals

• Open economy, free market dynamics

• Private Equity and joint venture funding Business Environment

• Initial development in established oil and gas basins with pre-existing infrastructure and proximity of supply to demand

• Ability to build/grow infrastructure Infrastructure

• Transparent regulations

• Landowner incentives and mineral rights Land Access &

Regulatory Terms

• Sweet spot position

• Technology advances such as geo-steering, LWD/MWD, imaging, simulation and modeling capabilities

Resource Base

• Favorable public opinion and minimal environmental footprint

• Low political risk Public Policy

• Existing and scalable service sector infrastructure + supplier base

• Successful replication of best practices from analogs

• Operational efficiencies, “factorization”

• Rig Availability

Upstream OFS

• Scale and access to resources Water Availability &

Management

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Mature Pipeline Infrastructure and Flexible Growth:

A Key Enabler for the US Shale Revolution

Major Natural Gas Supply Basins Relative to Natural Gas Pipeline Transportation Corridors

Source: US Energy Information Administration

Source: US Energy Information Administration

U.S. Natural Gas Pipeline Network

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THE INTERNATIONAL PLAYING FIELD

AND KEY PROSPECTS

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High Potential Global Resources

Current global proved reserves amount to 6,839 TCF of

wet gas and 1,624 Bn bbls of oil

Source: US Energy Information Administration and Advanced Resources International June 2013

Technically Recoverable Technically Recoverable

Shale Gas Resources Shale Oil Resources

(Tcf) (Billion Barrels)

1. US 1,161 1. Russia 75

2. China 1,115 2. US 48

3. Argentina 802 3. China 32

4. Algeria 707 4. Argentina 27

5. Canada 573 5. Libya 26

6. Mexico 545 6. Australia 18

7. Australia 437 7. Venezuela 13

8. South Africa 390 8. Mexico 13

9. Russia 285 9. Pakistan 9

10. Brazil 245 10. Canada 9

11. Others 1,535 11. Others 65

TOTAL 7,795 TOTAL 335

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International Shale Market Growth and Challenges

• Unpredictable state-controlled pricing regimes

• Complex geopolitics that influence trade balances Prices & Market Fundamentals

• Competitive landscape: strong state-owned NOCs dominating the playing field vs. IOCs presence

• Level of unconventional expertise and capital availability Business Environment

• Sufficient midstream capacity and proximity of supply to demand

• Stranded hydrocarbons in isolated terrains (e.g. the Amazon)

• Sufficient transportation to move oilfield equipment to/from sites Infrastructure

• Favorable or unfavorable fiscal terms

• Bureaucracy transparency and response time

• Maturity of development regulations

Land Access & Regulatory Terms

• Resources yet to be de-risked

• Scale of resource potential Resource Base

• Unpredictable security concerns and/or policy decisions

• Public opposition strongly aligned against both frac stimulation and infrastructure that could compromise environmental conservation

Public Policy

• Local content requirements prompting labor and equipment shortage

• Rig availability and supply chain sophistication Upstream OFS

• Water supply and weather constraints Water Availability &

Management

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Qualitative Assessment of International Unconventional Space

Dimension U.S. Canada Argentina MENA China Australia Mexico Europe Russia

Resource Base

Infrastructure/

Logistics

Public Policy,

Land Access

Development

Cost

Business

Environment

Upstream OFS

Water Avail. and

Management

Overall

Commerciality

Poor Good

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CONCLUSIONS

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Key Takeaways

￭ Similar to North America, unlocking international unconventional energy has

the potential to foster millions of jobs, encourage free enterprise growth,

generate significant government revenue, and profoundly transform global

economies and geopolitics as we know it today

￭ North American shale gas developments were uniquely driven by Independents

through technological progress over time

￭ IOCs, NOCs, and Independents alike will apply key lessons learned to

development of unconventional resources abroad

￭ The North American unconventional revolution has set the stage for global

evolution, but significant production impact may not appear over a 3-5 year

horizon

￭ International shale gas opportunities are mostly in early exploration; many

current-day wildcards and challenges could play out over time in an entirely

transformed landscape