hughes brussels may 14 2013 1

The Shale Revolution in North America:

Myths and Realities

Beyond the Hype: Economics of Shale Gas in Europe

EU Parliament

Brussels, Belgium

May 14, 2013

J. David Hughes

Post Carbon Institute

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.

- The way is clear for U.S. LNG exports to monetize the shale bounty.

© Hughes GSR Inc, 2012

- Tight Oil will allow U.S. production to exceed that of Saudi Arabia

and U.S. imports will shrink to zero.

- The Shale “REVOLUTION” will provide Europe with a growing

supply cheap gas for the foreseeable future.

- Shale Gas can replace very substantial amounts of oil for transport

and coal for electricity generation.

0

5

10

15

20

25

30

35

2010 2015 2020 2025 2030 2035 2040

Tri

llio

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ub

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eet

per

Yea

r

Year

LNG Imports Canada Imports Shale Gas

Alaska Coalbed Methane Tight Gas

Associated Conventional Offshore

U.S. Natural Gas Supply Projection by Source, 2010-2040,

EIA Reference Case 2013

Shale Gas

Coalbed Methane

50%

of 2

04

0 P

rod

uctio

n

55% increase in

production by 2040

Tight Gas

Conventional

Offshore

Associated

Alaska

U.S. Domestic consumption

(data from EIA Annual Energy Outlook 2013, Tables 13 and 14, http://www.eia.gov/forecasts/aeo/er/excel/yearbyyear.xlsx © Hughes GSR Inc, 2012

http://www.eia.gov/forecasts/aeo/er/excel/yearbyyear.xlsx

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35

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18

21

1995 1999 2003 2007 2011 2015 2019 2023 2027 2031 2035 2039

An

nu

al G

as P

rod

uctio

n (T

rillion

cub

ic feet) G

as

Pri

ce (

$U

S/m

cf)

Year

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

EIA Projections of Gas Price and U.S. Production

Compared to History, 1995-2040

© Hughes GSR Inc, 2012 (data from EIA Annual Energy Outlook 2013, EIA, 2012; International Monetary Fund)

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30

1998 2000 2002 2004 2006 2008 2010 2012

Tri

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ub

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eet

per

Yea

r

Year

Net LNG Imports Net Canadian Imports Dry Gas Production

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

Dry Gas Production

Net Canadian Imports

Net LNG Imports

© Hughes GSR Inc, 2013 (data from EIA current to August, 2012)

0

1

2

3

4

5

6

7

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

Bil

lion

Cu

bic

Feet

per

Day

Year

Vertical

Horizontal

Barnett Shale Production by Well Type, 2000-2012,

Illustrating Impact of Horizontal Drilling Technology

(data from DIdesktop, June, 2012, fitted with 5 month centered moving average including data up to March, 2012)

93%

of P

rod

uctio

n is fro

m H

orizo

nta

l Wells

Horizontal Wells

Vertical Wells


0

2

4

6

8

10

12

14

Haynesville Barnett Marcellus Fayetteville Woodford

$U

S/m

cf

Shale Play

Mean

Median

P20

P80

(data from Jacoby et al., Economics of Energy and Environmental Policy, vol. 1, no.1, 2012)

Breakeven Gas Price by Shale Play for a

10% Rate of Return


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20

25

30

2010 2011 2012 2013

Tri

llio

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ub

ic F

eet

per

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r

Year

U.S. Dry Gas Production, 2010-2013

U.S. production plateau September 2012-February 2013

(data from EIA Natural Gas Monthly, May, 2013) © Hughes GSR Inc, 2013

0

5

10

15

20

25

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

Bil

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ub

ic F

eet

per

Da

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Year

Other

Austin Chalk

Bone Spring

Bossier

Antrim

Niobrara

Bakken

Woodford

Eagle Ford

Fayetteville

Marcellus

Barnett

Haynesville

Shale Gas Production by Play, 2000-2012

(data from DIdesktop, September, 2012, fitted with 3 month centered moving average including data up to June, 2012)

Barnett Haynesville

40% of U.S. production


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20

25

May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12

Bil

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ic F

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Da

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Year

Other Austin Chalk Bone Spring Bossier Antrim Niobrara Bakken Woodford Eagle Ford Fayetteville Marcellus Barnett Haynesville

Shale Gas Production by Play, May 2011 – May 2012

Barnett

Haynesville

Marcellus

Fayetteville

Eagle Ford

© Hughes GSR Inc, 2012 (data from DI Desktop, HPDI, September, 2012)

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Shale Play

Shale Gas Production by Play

(data from DI Desktop, September, 2012, for production in most cases through May-June, 2012)

Top 3 Plays = 66% of Total

Top 6 Plays = 88% of Total


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 Well Quality - Top 20% with Highest One

Month Production of >10989 mcf/day in black

20 miles

30 miles


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1500

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2500

3000

3500

4000

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2007 2008 2009 2010 2011 2012

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pera

ting W

ells G

as

Pro

du

ctio

n (

Bil

lio

n c

ub

ic f

eet

per

da

y)

Year

Gas Production

Number of Wells

Haynesville Gas Production and Number of Operating

Wells, 2007-2012

© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)

0

1000

2000

3000

4000

5000

6000

7000

8000

1 6 11 16 21 26 31 36 41 46

Ga

s P

rod

uct

ion

(Th

ou

san

d c

ub

ic f

eet

per

Da

y)

Months on Production

Haynesville Type Gas Well Decline Curve

(data from DrillingInfo/HPDI, March, 2013)

Yearly Declines:

First year = 66%

Second year = 49%

Third year = 41%

Fourth year = 49%


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500

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1500

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2500

3000

3500

4000

0

1

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2007 2008 2009 2010 2011 2012

Nu

mb

er of O

pera

ting

pre

-20

12

Wells

Ga

s P

rod

uct

ion

(B

illi

on

cu

bic

fee

t p

er D

ay)

Year

Production from pre-2012 Wells

Number of pre-2012 Wells

Overall Field Decline for Haynesville Gas Production

based on Production Decline from pre-2012 Wells

Overall Field Decline = 47%


0

500

1000

1500

2000

2500

3000

3500

0

500

1000

1500

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2500

3000

3500

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2008 2009 2010 2011 2012

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ells A

ver

ag

e P

rod

uct

ion

per

Wel

l

(Th

ou

san

d c

ub

ic f

eet

per

da

y)

Year

Average Production per Well

Number of Wells

Haynesville Average Production per Well


0

200

400

600

800

1000

1200

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

2009 2010 2011 2012

An

nu

al N

um

ber o

f Wells A

dd

ed

An

nu

al

Pro

du

ctio

n A

dd

ed p

er W

ell

(Th

ou

san

d c

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ic f

eet

per

da

y)

Year

Yearly Production Added per Well

Yearly Wells Added

Haynesville Annual Production Added per New Well


Need 680 wells per year

to keep production flat

0

10000

20000

30000

40000

50000

0 10 20 30 40 50 60 70 80 90 100

Hig

hes

t M

on

thly

Pro

du

ctio

n (

Mcf

/day

)

Percentage of Wells

Haynesville Well Quality

Highest One Month Gas Production from Individual Wells

Median = 7954 mcf/day

Mean = 8201 mcf/day

© Hughes GSR Inc, 2012 (data from DI Desktop, HPDI, September, 2012)

Haynesville Operating Wells with Sweet Spot (Red)

30 miles

Sweet Spot

30 by 18 miles

<20% of Field


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9

2008 2009 2010 2011 2012

Bil

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Sweet Spot

Non-Sweet Spot

Non-Sweet Spot = >80% of area

Haynesville Production from

Sweet Spot vs Non-Sweet Spot Areas

Sweet Spot = <20% of area Sweet Spot comprises 29% of

the total wells and produces

39% of the gas


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4000

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7000

8000

9000

10000

1 6 11 16 21 26 31 36 41 46

Ga

s P

rod

uct

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(Th

ou

san

d c

ub

ic f

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per

Da

y)


Haynesville Type Gas Well Decline Curves

Sweet Spot vs Areas outside Sweet Spot

(data from DrillingInfo/HPDI, May, 2013)

Sweet Spot

First year = 64%

Second year = 40%

Third year = 32%

Fourth year = 40%


Outside Sweet Spot

First year = 68%

Second year = 54%

Third year = 50%

Fourth year = 32%

Sweet Spot EUR=5.6 bcf

Outside Sweet Spot EUR=2.9 bcf

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2500

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0.5

1

1.5

2

2.5

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3.5

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4.5

5

2007 2008 2009 2010 2011 2012

Nu

mb

er of O

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ting

pre

-20

12

Wells

Ga

s P

rod

uct

ion

(B

illi

on

cu

bic

fee

t p

er D

ay)

Year

Production from pre-2012 Sweet Spot Wells Production from pre-2012 Non-Sweet Spot Wells Pre-2012 Sweet Spot Wells Pre-2012 Non-Sweet Spot Wells

Overall Field Decline for Haynesville Gas Production

based on Production Decline from pre-2012 Wells

Sweet Spot Field Decline = 41%

Non-Sweet Spot Field Decline = 49%


0

500

1000

1500

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2500

0

1000

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2008 2009 2010 2011 2012

Nu

mb

er of W

ells A

nn

ua

l P

rod

uct

ion

Ad

ded

per

Ho

rizo

nta

l

Wel

l (B

arr

els

per

da

y)

Year

Average Production per Sweet Spot Well Average Production per Non-Sweet Spot Well Number of Sweet Spot Wells Number of Non-Sweet Spot Wells

Haynesville Average Production per Well Comparing

Sweet Spot to Non-Sweet Spot Wells

© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, May, 2013)

Haynesville Sweet Spot Well Footprint

1 mile


Barnett Well Quality - Top 20% with Highest One Month

Production of >2436 mcf/day in black

30 miles


Barnett Well Quality - Top 20% with Highest One Month

Production of >2436 mcf/day in black

5 miles


0

2000

4000

6000

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12000

14000

16000

18000

20000

22000

0

1

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2005 2006 2007 2008 2009 2010 2011 2012

Nu

mb

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ting W

ells G

as

Pro

du

ctio

n (

Bil

lio

n c

ub

ic f

eet

per

da

y)

Year

Gas Production

Number of Wells

Barnett Gas Production and Number of Operating Wells,

2007-2012


0

200

400

600

800

1000

1200

1400

1600

1800

1 6 11 16 21 26 31 36 41 46

Ga

s P

rod

uct

ion

(Th

ou

san

d c

ub

ic f

eet

per

Da

y)


Barnett Type Gas Well Decline Curve

(data from DrillingInfo/HPDI, March, 2013)

Yearly Declines:

First year = 58%

Second year = 33%

Third year = 26%

Fourth year = 20%


0

2000

4000

6000

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10000

12000

14000

16000

18000

20000

0

1

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2007 2008 2009 2010 2011 2012

Nu

mb

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ting

pre

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12

Wells

Ga

s P

rod

uct

ion

(B

illi

on

cu

bic

fee

t p

er D

ay)

Year

Production from pre-2012 Wells

Number of pre-2012 Wells

Overall Field Decline for Barnett Gas Production based on

Production Decline from pre-2012 Wells

Overall Field Decline = 28%


0

2000

4000

6000

8000

10000

12000

14000

16000

0

100

200

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2005 2006 2007 2008 2009 2010 2011 2012

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ells A

ver

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rod

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p

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ell

(Th

ou

san

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ic f

eet

per

da

y)

Year

Average Production per Well

Number of Wells

Barnett Average Production per Well


University of Texas Barnett Study Heralded as a Good News

Story of Long Term Growth by Wall Street Journal (Feb 2013)

Peak 2012

60% Decline by 2030

Marcellus Well Quality - Top 20% with Highest One

Month Production of >3603 mcf/day in black

100 miles


0

500

1000

1500

2000

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3500

4000

4500

0

1

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2005 2006 2007 2008 2009 2010 2011 2012

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g W

ells P

rod

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(B

illi

on

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bic

Fee

t p

er D

ay)

Year

Horizontal Production

Vertical Production

Total Production

Horizontal Wells

Vertical Wells

Total Wells

Pennsylvania Marcellus Production vs Well Type


0

500

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1500

2000

2500

3000

2007 2008 2009 2010 2011 2012

Av

era

ge

Da

ily

Pro

du

ctio

n p

er W

ell

(Th

ou

san

d C

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ic F

eet

per

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)

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Horizontal Average Production

Vertical Average Production

Total Average Production

Pennsylvania Marcellus Daily Well Production by Well Type


0

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1.6

1.8

Pro

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ctio

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bil

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cu

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fee

t p

er d

ay)

County

Pennsylvania Marcellus Production By County


Top 2 counties = 46% of production



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2009 2010 2011 2012

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Remaining 27 counties (15%) Washington (9%) Tioga (9%) Greene (10%) Lycoming (12%) Susquehanna (22%) Bradford (24%)

Pennsylvania Marcellus Production and Number of Horizontal

Wells by County

Production

0

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2009 2010 2011 2012

Nu

mb

er o

f O

per

ati

ng W

ells

Year

Remaining 27 counties (20%) Washington (15%) Tioga (14%) Greene (9%) Lycoming (10%) Susquehanna (12%) Bradford (20%)

Number of Wells

Bradford Bradford

Bradford and

Susquehanna

counties

produce 46%

of the gas

with 32% of

the wells


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6000

1 6 11 16 21 26 31 36

Ga

s P

rod

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(M

cf p

er D

ay

)


Bradford (24%)

Susquehanna (22%)

Lycoming (12%)

Greene (10%)

Tioga (10%)

Washington (9%)

Remaining 27 Counties (15%)

Type Decline Curves for Marcellus Horizontal Wells by County


0

0.5

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5

Est

ima

ted

Ult

imate

Rec

over

y (

Bcf

)

County

Remaining Well Life

First 3 years

Estimated Ultimate Recovery for Pennsylvania Marcellus

Horizontal Wells By County

62%-77% produced in first 3 years

EIA EUR estimate of 1.56 bcf

underestimates best Counties


Top Tier Counties (Red=Horizontal; Black=Vertical)


Well Footprint – Dimock, Susquehanna County, PA


1 Mile

Well Footprint – Washington County, Pennsylvania


0.25 Mile

0

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1.2

2008 2009 2010 2011 2012

Av

era

ge

Inti

al

Pro

du

ctiv

ity

p

er W

ell

Ind

exed

to

20

10

Year

Marcellus

Haynesville

Barnett

Fayetteville

Woodford

Marcellus - Youth

Horizontal Well Quality Trends – Top Five Shale Gas Plays


Fayetteville – Early Middle Age

Barnett – Middle Age

Haynesville – Late Middle Age

Woodford – Early Old Age

Prognosis for Future Production based on

Latest Rig Count


Field Rank

Number of

Wells needed

annually to

offset decline

Wells Added

for most

recent Year

October 2012

Rig Count Prognosis

Haynesville 1 774 810 20 Decline

Barnett 2 1507 1112 42 Decline

Marcellus 3 561 1244 110 Growth

Fayetteville 4 707 679 15 Decline

Eagle Ford 5 945 1983 274 Growth

Woodford 6 222 170 61 Decline

Granite Wash 7 239 205 N/A Decline

Bakken 8 699 1500 186 Growth

Niobrara 9 1111 1178 ~60 Flat

(well cost data from various sources and is approximate)

Annual Capex Required to Offset Overall Annual

Decline by Shale Play


Field Rank

Number of

Wells needed

annually to

offset decline

Approximate

Well Cost

(million $US)

Annual Well

Cost to Offset

Decline

(million $US)

Haynesville 1 774 9.0 6966

Barnett 2 1507 3.5 5275

Marcellus 3 561 4.5 2525

Fayetteville 4 707 2.8 1980

Eagle Ford 5 945 8.0 7558

Woodford 6 222 8.0 1776

Granite Wash 7 239 6.0 1434

Bakken 8 699 10.0 6990

Niobrara 9 1111 4.0 4444

Antrim 10 ~400 0.5 200

Bossier 11 21 9.0 189

Bone Spring 12 206 3.7 762

Austin Chalk 13 127 7.0 889

Permian Delaware Midland 14 122 6.9 842

Total 7641 41829

2012 Impairment Charges on U.S. Shale Assets

The Reality Check

- Chesapeake - $2.02 Billion

- BP - $2.11 Billion

- BG Group - $1.3 Billion

- BHP - $2.84 Billion


"We are all losing our shirts today." Rex Tillerson [CEO of Exxon

Mobil] said "We're making no money. It's all in the red.“

(Wall Street Journal, June, 2012)

And 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

- 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

- High levels of water consumption

• High field decline rates require a drilling treadmill to maintain production – 30-50% of production must be replaced each year with more drilling.

• 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.

• The drilling treadmill will accelerate as sweet spots are drilled off and well quality declines as drilling moves into more marginal areas.

• Over-hyped in terms of long term supply especially at low forecast prices.

• Collateral environmental impacts associated with fracking have already, and will continue to create public opposition to unfettered access to drill sites which are mandatory to maintain supply.

The Shale “REVOLUTION”

• US “Energy Independence” with the forecast energy trajectory is highly unlikely, barring a radical reduction in consumption.

• Almost all eggs are in the shale basket as a hope in meeting U.S. energy supply growth projections from oil and gas.

Implications

• Replicating the “Shale Revolution”, to the extent it exists, will take much longer in Europe, if ever. There is no reason to expect that the geology will be much different – the greatest potential will lie in a few plays and parts thereof. Higher population densities will make surface access for the large number of drilling locations required much more difficult. Due to high population densities the collateral environmental impacts of fracking are likely to be even more apparent – and opposed – than they are in 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.

hughes brussels may 14 2013 1

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