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
TrillionCubicFeetperYear
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%of2040Production
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

0
5
10
15
20
25
30
35
0
3
6
9
12
15
18
21
1995 1999 2003 2007 2011 2015 2019 2023 2027 2031 2035 2039
AnnualGasProduction(Trillioncubicfeet)
GasPrice($US/mcf)
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)

0
5
10
15
20
25
30
1998 2000 2002 2004 2006 2008 2010 2012
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
BillionCubicFeetperDay
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%ofProductionisfromHorizontalWells
Horizontal Wells
Vertical Wells

0
2
4
6
8
10
12
14
Haynesville Barnett Marcellus Fayetteville Woodford
$US/mcf
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

0
5
10
15
20
25
30
2010 2011 2012 2013
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
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

0
5
10
15
20
25
May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12
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)

0
1
2
3
4
5
6
7
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

0
500
1000
1500
2000
2500
3000
3500
4000
0
1
2
3
4
5
6
7
8
9
2007 2008 2009 2010 2011 2012
NumberofOperatingWells
GasProduction(Billioncubicfeetperday)
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
GasProduction
(ThousandcubicfeetperDay)
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%

0
500
1000
1500
2000
2500
3000
3500
4000
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012
NumberofOperatingpre-2012Wells
GasProduction(BillioncubicfeetperDay)
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
2000
2500
3000
3500
4000
2008 2009 2010 2011 2012
NumberofWells
AverageProductionperWell
(Thousandcubicfeetperday)
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
AnnualNumberofWellsAdded
AnnualProductionAddedperWell
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
HighestMonthlyProduction(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

0
1
2
3
4
5
6
7
8
9
2008 2009 2010 2011 2012
Year
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

0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1 6 11 16 21 26 31 36 41 46
GasProduction
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

0
500
1000
1500
2000
2500
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2007 2008 2009 2010 2011 2012
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
2000
2500
0
1000
2000
3000
4000
5000
6000
7000
8000
2008 2009 2010 2011 2012
NumberofWells
AnnualProductionAddedperHorizontal
Well(Barrelsperday)
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
8000
10000
12000
14000
16000
18000
20000
22000
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012
GasProduction(Billioncubicfeetperday)
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
GasProduction
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
8000
10000
12000
14000
16000
18000
20000
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012
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
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012
NumberofWells
AverageProductionperWell
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
2500
3000
3500
4000
4500
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012
NumberofProducingWells
Production(BillionCubicFeetperDay)
Year
Horizontal Production
Vertical Production
Total Production
Horizontal Wells
Vertical Wells
Total Wells
Pennsylvania Marcellus Production vs Well Type

0
500
1000
1500
2000
2500
3000
2007 2008 2009 2010 2011 2012
AverageDailyProductionperWell
(ThousandCubicFeetperDay)
Year
Horizontal Average Production
Vertical Average Production
Total Average Production
Pennsylvania Marcellus Daily Well Production by Well Type

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Production(billioncubicfeetperday)
County
Pennsylvania Marcellus Production By County
Top 2 counties = 46% of production

0
1
2
3
4
5
6
7
8
2009 2010 2011 2012
Year
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
500
1000
1500
2000
2500
3000
3500
2009 2010 2011 2012
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

0
1000
2000
3000
4000
5000
6000
1 6 11 16 21 26 31 36
GasProduction(McfperDay)
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
1
1.5
2
2.5
3
3.5
4
4.5
5
EstimatedUltimateRecovery(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
0.2
0.4
0.6
0.8
1
1.2
2008 2009 2010 2011 2012
AverageIntialProductivityperWell
Indexedto2010
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.

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