Shale Myths and Realties

The Shale Revolution in the United States:
Myths and Realities

Briefing Washington D.C. May 22, 2013
J. David Hughes
Conventional Wisdom
The United States is on the verge of Energy Independence thanks to the Shale REVOLUTION. Shale Gas production will continue to grow for the foreseeable future (2040 at least) and prices will remain below $4.50/mcf for the next 10 years and below $6.00/mcf for the next 20 years. Shale Gas can replace very substantial amounts of oil for transport and coal for electricity generation. The way is clear for U.S. LNG exports to monetize the shale bounty. Tight Oil will allow U.S. production to exceed that of Saudi Arabia and U.S. imports will shrink to zero.
Hughes GSR Inc, 2012
U.S. Natural Gas Supply Projection by Source, 2010-2040, EIA Reference Case 2013
35
30
LNG Imports Alaska Associated Canada Imports Coalbed Methane Conventional Shale Gas Tight Gas Offshore
55% increase in production by 2040 50% of 2040 Production
Trillion Cubic Feet per Year
U.S. domestic consumption
25 Shale Gas 20 15 10 5 0 2010 Tight Gas Associated Conventional Offshore 2015 2020 2025 2030 2035 2040
Alaska
Year
(data from EIA Annual Energy Outlook 2013, Tables 13 and 14, http://www.eia.gov/forecasts/aeo/er/excel/yearbyyear.xlsx)
EIA Projections of Gas Price and U.S. Production Compared to History, 1995-2040
21 18 35 30 25 Russian Gas Price Indonesia LNG Gas Price in Japan U.S. Henry Hub Gas Price EIA Forecast U.S. Gas Price ($2011) Actual U.S. Gas Production EIA Forecast U.S. Gas Production 20 15 10 5 0 2011 2015 2019 2023 2027 2031 2035 2039
Annual Gas Production (Trillion cubic feet)
Gas Price ($US/mcf)
15 12 9 6 3 0 1995 1999 2003 2007
Year
(data from EIA Annual Energy Outlook 2013, EIA, 2012; International Monetary Fund)
U.S. Gas Production and Imports, 1998-2012

30 Net LNG Imports Net Canadian Imports Dry Gas Production 25
Net LNG Imports
20
Net Canadian Imports
15
10
Dry Gas Production
0 1998
2000
2002
2004
2006
2008
2010
2012
Year
(data from EIA current to August, 2012)
U.S. Dry Gas Production, 2010-2013

30
U.S. production plateau September 2012 - February 2013

25
20
15
10
0 2010
2011
2012
2013
Year
(data from EIA Natural Gas Monthly, May, 2013)
Shale Gas Production by Play, 2000-2012

25 Other Austin Chalk Bone Spring Bossier Antrim Niobrara Bakken Woodford Eagle Ford Fayetteville Marcellus Barnett Haynesville 40% of U.S. production
Billion Cubic Feet per Day
20
15
10
Barnett
Haynesville
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Year
(data from DIdesktop, September, 2012, fitted with 3 month centered moving average including data up to June, 2012)
Shale Gas Production by Play

7
6
5 4 3
Top 3 Plays = 66% of Total Top 6 Plays = 88% of Total
2
1 0
Shale Play
(data from DI Desktop, September, 2012, for production in most cases through May-June, 2012)
Production from Top Five Shale Gas Plays Constituting 80% of 2012 Production (3-month moving average)
25 PA Marcellus Woodford Fayetteville Barnett Haynesville
Production ex-Marcellus peaked in January 2012
20
Marcellus
Woodford
15
Fayetteville
Barnett
10
Haynesville
0
Year
Top Five Shale Gas Plays Constituting 80% of Shale Gas Production, 2011-2012
Production
25
PA Marcellus Woodford Fayetteville Barnett Haynesville
30000
Number of Wells
20
Marcellus
Woodford
Number of Operating Wells
25000
20000
Fayetteville
15000
15
Fayetteville
Barnett
10
10000
Barnett
Haynesville
0
5000
Haynesville
0
Month
Month
The Shale Play Life Cycle

Discovery followed by leasing frenzy.
Drilling boom follows to meet held-by-production lease requirements.

Sweet spots identified, targeted and drilled off.
Gas production rises rapidly and is maintained for cash-flow despite uneconomic full-cycle costs.
Sweet spots become saturated and well quality and field production decline. Plays like the Haynesville become middle aged after just five years.
Haynesville Gas Production and Number of Operating Wells, 2007-2012

9 4000
Gas Production (Billion cubic feet per day)
8 7 Gas Production Number of Wells
3500
3000 2500
6
5 2000 4 1500 3 2
1000
500 0 2008 2009 2010 2011 2012
1
0 2007
Year
(data from DrillingInfo/HPDI, March, 2013)
Haynesville Type Gas Well Decline Curve

8000 7000 6000 5000 Yearly Declines First year = 66% Second year = 49% Third year = 41% Fourth year = 49%
Gas Production (Thousand cubic feet per Day)
4000
3000 2000 1000 0 1 6 11 16 21 26 31 36 41 46
Months on Production
Overall Field Decline for Haynesville Gas Production based on Production Decline from pre-2012 Wells
8 4000
Gas Production (Billion cubic feet per Day)
Number of Operating pre-2012 Wells
7
6 5
Production from pre-2012 Wells Number of pre-2012 Wells
3500
3000 2500
Overall Field Decline = 47%

4 3 2000 1500
2
1 0 2007
1000
500 0 2008 2009 2010 2011 2012
Year
Haynesville Average Production per Well

4000 3500 3500
3000
Average Production per Well (Thousand cubic feet per day)
3000
2500
2500
Number of Wells
2000 2000 1500 1500 1000 1000 Average Production per Well Number of Wells
500
0 2008
500
0 2009 2010 2011 2012

Year
Haynesville Annual Production Added per New Well

5000 4000 1000 3000 2000 1000 0 -1000 -2000 -3000 -4000 2009
1200
Annual Production Added per Well (Thousand cubic feet per day)
Annual Number of Wells Added
800
Need 680 wells per year to keep production flat
600
400
Yearly Production Added per Well Yearly Wells Added
200
0 2010 2011 2012

Year
Haynesville Sweet Spot Well Footprint
1 mile
Type Gas Well Decline Curves for Top Five Shale Gas Plays Constituting 80% of Shale Gas Production
8000 7000 6000 5000 4000 3000 2000 1000 0 1
Gas Production (Thousand cubic feet per Day)
Haynesville Marcellus Barnett Fayetteville Woodford
Average 3-Year Decline = 84%
3-Year Decline Haynesville = 89% Marcellus = 79% Barnett = 79% Fayetteville= 80% Woodford = 77%
11
16
21
26
31
36
41
46
Overall Field Decline for Top Five Shale Gas Plays based on Production Decline from pre-2012 Wells
8
Gas Production (Billion cubic feet per Day)
7
6 5 4 3
Field Decline (per year) Haynesville = 47% Marcellus = 29% Barnett = 28% Fayetteville = 35% Woodford = 44%
Average Field Decline = 37%
2
1 0 2008
Haynesville Marcellus Barnett Fayetteville Woodford
2009
2010
2011
2012
Year
Pennsylvania Marcellus Production By County

Production (billion cubic feet per day)
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Top 2 counties = 46% of production Top 4 counties = 68% of production Top 6 counties = 85% of production
County
Type Decline Curves for Marcellus Horizontal Wells by County

6000 Bradford (24%) Susquehanna (22%) Lycoming (12%) Greene (10%) Tioga (10%) Washington (9%) Remaining 27 Counties (15%)
Gas Production (Mcf per Day)
5000
4000
3000
2000
1000
0 1
11
16
21
26
31
36
Estimated Ultimate Recovery for Pennsylvania Marcellus Horizontal Wells By County

Production (billion cubic feet per day)
5 4.5 4
3.5 3 2.5 2 1.5 1 0.5 0 Remaining Well Life First 3 years 62%-77% produced in first 3 years. EIA EUR estimate of 1.56 bcf underestimates best counties.
County
Well Footprint Dimock, Susquehanna County, PA
1 Mile
Horizontal Well Quality Trends Top Five Shale Gas Plays

1.2 Marcellus Youth
Average Intial Productivity per Well Indexed to 2010
Fayetteville Early Middle Age

1 Barnett Middle Age
0.8
0.6
Haynesville Late Middle Age
Woodford Early Old Age 0.4 Marcellus Haynesville Barnett Fayetteville Woodford 2009 2010 2011 2012
0.2
0 2008
Year
Annual Capex Required to Offset Overall Annual Decline by Shale Play

Field Rank Number of Wells Needed Annually to Offset Decline 774 1507 561 707 945 222 239 699 1111 ~400 21 206 127 122 7641 Approximate Well Cost (million $US) Annual Well Cost to Offset Decline (million $US)
Haynesville Barnett Marcellus Fayetteville Eagle Ford Woodford Granite Wash Bakken Niobrara Antrim Bossier Bone Spring Austin Chalk Permian Delaware Midland Total
1 2 3 4 5 6 7 8 9 10 11 12 13 14
9.0 3.5 4.5 2.8 8.0 8.0 6.0 10.0 4.0 0.5 9.0 3.7 7.0 6.9
6966 5275 2525 1980 7558 1776 1434 6990 4444 200 189 762 889 842 41829
(well cost data from various sources and is approximate)
The Reality Check
"We are all losing our shirts today. We're making no money. It's all in the red.
(Rex Tillerson, CEO of Exxon Mobil, Wall Street Journal, June 2012)
Citigroup 2012 Projection of U.S. Shale Oil, 2010-2022 (limitless well locations and no declines)
Thousand Barrels per Day
Crude Oil and Other Liquids Production by Shale Play

600
500 400
Top 2 Plays = 81% of Total Top 5 Plays = 92% of Total
300
200 100
Shale Play
(data from HPDI, September, 2012, for production in most cases through May-June, 2012)
Top Two Tight Oil Plays Constituting 80% of Production (3-month moving average)
1600 1400 Eagle Ford Bakken
1200
1000
800 600 400 200
Eagle Ford
Bakken
2009 2010 2011 2012
0 2008
Year
Top Two Tight Oil Plays Constituting 80% of Tight Oil Production, 2011-2012
Production
1600 1400 Eagle Ford Bakken 12000
Number of Wells
Eagle Ford Bakken
1200
10000
8000
1000
800 600 400 200
Eagle Ford
6000
Eagle Ford
4000
Bakken
2000
Bakken
Year
Year
Type Oil Well Decline Curves for Top Two Tight Oil Plays Accounting for 80% of Tight Oil Production
600 Eagle Ford Bakken
Oil Production (Barrels per Day)
500
400
Average 3-Year Decline = 89%

300
3-Year Decline Bakken = 85% Eagle Ford = 95%
200
100
0 1
11
16
21
26
31
36
41
46
Overall Field Decline Top Two Tight Oil Plays based on Production Decline from pre-2012 Wells
700
Oil Production (Thousand bbls/day)
600
Eagle Ford Bakken
500
Average Field Decline = 41%
Field Decline (per year) Bakken = 44% Eagle Ford = 38%
400
300
200
100
0 2007
2008
2009
2010
2011
2012
Year
Eagle Ford Tight Oil Production vs Operating Wells

1200 16000
Peak 1031 Kbbls/day in 2015 if 2500 wells added each year Peak 891 Kbbls/day In 2016 if 1983 wells added each year
Production (Thousand Barrels per Day)
14000
1000
Number of Producing Wells
12000 800
Assumptions - EIA estimate of 11406 remaining locations is as of 1/1/2010 is correct. - Well quality is maintained at 2011 levels.
10000 8000 6000 4000
600
400
200
Production at 1983 wells/year Production at 2500 wells/year Drilling Rate 1983 wells/year Drilling Rate 2500 wells/year
2000 0
0 2008
2013
2018
2023
(data from DI Desktop, HPDI, September, 2012)
Year
Bakken/Three Forks Production By County, North Dakota and Montana

Production (Thousand Barrels per day)
250 Total Production = 694 Kbbls/day Top 2 counties = 52% of production Top 4 counties = 85% of production
200
150
100
50
0 Montrail Mckenzie Williams Dunn Remaining 9 counties Montana
County
700
Bakken/Three Forks Type Decline Curves for Horizontal Wells by County including Montana
Montrail (29%) Mckenzie (23%) Williams (16%) Dunn (16%) Bottom 9 counties (9%) Montana (6%)
Oil Production (Barrels per Day)
600
500
400
Overall Average Oil First year = 70% Second year = 36% Third year = 24% Fourth year = 19%
300
200
100
0 1
11
16
21
26
31
36
41
46
Bakken/Three Forks Estimated Ultimate Recovery per Well By County, North Dakota and Montana
Cumulative Production (Thousand Barrels)
800 700 600 500 400 300 200
All wells hit stripper status (10 barrels per day) within 12-25 years. The 10% terminal decline assumed is likely highly optimistic.
Cumulative for remainder of well life Cumulative during first four years
EIA assumes 550 Kbbls Ultimate Recovery for All Wells
100
0 Montrail Mckenzie Williams Dunn Lowest 9 counties Montana
County
Horizontal Well Development in the Parshall Area Sweet Spot of the Bakken
3 Miles
(data from North Dakota DNR, 2013)
Bakken Shale Oil Production vs Operating Wells

18000
Production (Thousand Barrels per Day)
1200
Peak 1099 Kbbls/day in 2015 if 2000 wells added each year
Peak 973 Kbbls/day in 2017 if 1500 wells added each year
16000
Number of Producing Wells
1000
Production at 1500 wells/year Production at 2000 wells/year Drilling Rate 1500 wells/year Drilling Rate 2000 wells/year
14000 12000 10000
800
600
400
Assumptions - EIA estimate of 9767 remaining locations as of 1/1/2010 is correct. -Well quality is maintained at 2011 levels.
8000 6000 4000 2000
200
0 2000
2005
2010
2015
2020
0 2025
Year
(data from DI Desktop, HPDI, September, 2012)
Horizontal Well Quality Trends Top Two Tight Oil Plays

1.6 Eagle Ford Youth 1.4
Average Intial Productivity per Well Indexed to 2010
1.2
1 0.8
Bakken Eagle Ford
Bakken Middle Age

0.6 0.4
0.2
0 2008
2009
2010
2011
2012
Year
There is no such thing as a FREE LUNCH
There has been a great deal of pushback by many in the general public and in State and National governments to environmental issues surrounding hydraulic fracturing.
There is no such thing as a FREE LUNCH
High levels of water consumption

Methane contamination of groundwater Disposal of produced fracture fluid potentially contaminating groundwater and inducing earthquakes Industrial footprint truck traffic, air emissions etc.
Full cycle greenhouse gas emissions which may be worse than coal
The Shale REVOLUTION

Over-hyped in terms of long-term supply, especially at low forecast prices. High quality shale plays are not ubiquitous:
88% of shale gas production comes from 6 of 30 plays.

81% of tight oil production comes from 2 of 21 plays. High field decline rates require a drilling treadmill to maintain production: 30-50% of production must be replaced each year with more drilling. The drilling treadmill will accelerate as sweet spots are drilled off and well quality declines as drilling moves into more marginal areas. Collateral environmental impacts associated with fracking have already created (and will continue to create) public opposition to unfettered access to drill sites which are mandatory to maintain supply.
Implications for the U.S.

The Shale Revolution has been a game-changer in that it has temporarily reversed a terminal decline in supplies from conventional sources. Long-term sustainability is highly questionable and environmental impacts are a major concern. Almost all eggs are in the shale basket as a hope in meeting U.S. energy supply growth projections from oil and gas.
US Energy Independence with the forecast energy consumption trajectory is highly unlikely, barring a radical reduction in consumption.
The Shale Revolution has provided a temporary respite from declining oil and gas production, but should not be viewed as a panacea for increasing energy consumption and exporting the bounty. Rather, it should be used as an opportunity to create the infrastructure needed for a lower energy throughput and alternative energy sources.
Download the report at shalebubble.org
davehughes@twincomm.ca

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Shale Myths and Realties

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The Shale Revolution in the United States:

Myths and Realities

55% increase in production by 2040 50% of 2040 Production

Trillion Cubic Feet per Year

U.S. domestic consumption

Annual Gas Production (Trillion cubic feet)

Gas Price ($US/mcf)

15 12 9 6 3 0 1995 1999 2003 2007

U.S. Gas Production and Imports, 1998-2012

Net LNG Imports

Trillion Cubic Feet per Year

Net Canadian Imports

Dry Gas Production

(data from EIA current to August, 2012)

U.S. Dry Gas Production, 2010-2013

U.S. production plateau September 2012 - February 2013

Trillion Cubic Feet per Year

(data from EIA Natural Gas Monthly, May, 2013)

Shale Gas Production by Play, 2000-2012

Billion Cubic Feet per Day

Shale Gas Production by Play

Billion Cubic Feet per Day

Top 3 Plays = 66% of Total Top 6 Plays = 88% of Total

Production ex-Marcellus peaked in January 2012

Billion Cubic Feet per Day

Billion Cubic Feet per Day

Number of Operating Wells

The Shale Play Life Cycle

Drilling boom follows to meet held-by-production lease requirements.

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

Gas Production (Billion cubic feet per day)

8 7 Gas Production Number of Wells

Number of Operating Wells

(data from DrillingInfo/HPDI, March, 2013)

Haynesville Type Gas Well Decline Curve

Gas Production (Thousand cubic feet per Day)

(data from DrillingInfo/HPDI, March, 2013)

Gas Production (Billion cubic feet per Day)

Number of Operating pre-2012 Wells

Production from pre-2012 Wells Number of pre-2012 Wells

Overall Field Decline = 47%

(data from DrillingInfo/HPDI, March, 2013)

Haynesville Average Production per Well

Average Production per Well (Thousand cubic feet per day)

0 2009 2010 2011 2012

Haynesville Annual Production Added per New Well

Annual Number of Wells Added

Need 680 wells per year to keep production flat

Yearly Production Added per Well Yearly Wells Added

0 2010 2011 2012

Haynesville Sweet Spot Well Footprint

Hughes GSR Inc, 2013

Gas Production (Thousand cubic feet per Day)

Haynesville Marcellus Barnett Fayetteville Woodford

Average 3-Year Decline = 84%

Gas Production (Billion cubic feet per Day)

Average Field Decline = 37%

Haynesville Marcellus Barnett Fayetteville Woodford

Pennsylvania Marcellus Production By County

Type Decline Curves for Marcellus Horizontal Wells by County

Gas Production (Mcf per Day)

Estimated Ultimate Recovery for Pennsylvania Marcellus Horizontal Wells By County

Well Footprint Dimock, Susquehanna County, PA

Hughes GSR Inc, 2013