The Counterfeit Shale Revolution & The Epidemic of Over-Production

Transcription

1 The Counterfeit Shale Revolution & The Epidemic of Over-Production Art Berman Labyrinth Consulting Services, Inc. Ray Leonard Hyperdynamics Dallas Geological Society Dallas, Texas May 12, 2015 Slide 1

2 The Counterfeit Shale Revolu4on The shale revolu4on is counterfeit. Tight oil and shale gas are imita4ons of something valuable and shale play promoters inten4onally deceive the public about their true value. It is counterfeit because the cost of produc4on is more than the global economy can bear. Producers and analysts deceive the public with misleading and incorrect break- even prices that exclude important costs or are based on exaggerated reserves. There is no revolu4on: it is a final, desperate effort to squeeze the last remaining petroleum from the worst possible rock. Oil and gas from shale is called unconven4onal, a euphemism for expensive: neither is commercial at current prices. Over- produc4on by shale players has ruined every market they have entered: natural gas, natural gas liquids and now, crude oil. This has been possible because of a capital bubble and disregard for investor value. Slide 2

3 The Beau4ful Story We imagine that we are in the midst of an energy revolu4on today with the advent of oil and gas produc4on from shale. This new fron4er will refill our energy reserve account and the world will experience growth like never before. That is what we are told and what we want to believe. But it is not true. The problem is that it costs more than the market can bear. Oil and gas produc4on from shale is not a revolu4on it is a re4rement party. Labyrinth Consul4ng Services, Inc. Slide 3

4 The Cost of Tight Oil According to Schlumberger Oil and gas produced from shale reservoirs is much more expensive than conven4onal oil and gas. The marginal cost of 4ght oil produc4on is about $75 per barrel. Slide 4

5 The Cost of Tight Oil According to Schlumberger U.S. 4ght oil required 100 4mes more wells to produce approximately the same volume of oil as Saudi Arabia. That cost more than 100 4mes as much. Slide 5

6 The Cost of Shale Gas According to a Marcellus- U4ca Player s 10- Q Antero'Resources Total'MCFE 133,642,000 Realized'Price'MCFE $4.42 Net'Per'MCFE A$1.53 $"Thousands $/mcfe Operating'Expense $122,388 $0.92 Production'Taxes $21,039 $0.16 G&A $50,985 $0.38 Interest'Expense $31,342 $0.23 Total'NonACapital'Cost $225,754 $1.69 Capex $569,068 $4.26 Total'Costs $794,822 $5.95 Impairments $8,577 Q1#2015Production Natural#Gas#mcf 112,000,000 NGL#bbl 3,241,000 Crude#Oil#bbl 366,000 Total#MCFE 133,642,000 Source: Company Q Filings and The marginal cost of shale gas produc4on is about $6 per mcf. This includes the value upli\ of NGLs and condensate. 10- K & 10- Q filings represent op4mis4c es4mates of break- even prices because they only reflect current period costs and not the cost of legacy produc4on or write- downs. Slide 6

7 Tight Oil & Shale Gas Plays Are Not Profitable for Most Companies Oil$Weighted 2014/FCF 2013/FCF FCF/Change CF/CE Debt/Equity 2014/DEBT 2013/DEBT Debt/Change OXY $451 $3,247,$2, $6,838 $6,939,$101 EOG $402 $269 $ $5,910 $5,913,$3 MRO $327 $504,$ $6,391 $6,597,$206 WTI,$46 $8,$ $1,360 $1,205 $155 SFY,$80,$229 $ $1,075 $1,142,$68 COP,$350 $550,$ $22,565 $21,662 $903 CRZO,$360,$421 $ $1,351 $900 $451 PDCE,$392,$236,$ $665 $605 $60 PVA,$491,$243,$ $1,110 $1,281,$171 OAS,$528,$1,756 $1, $2,700 $2,536 $164 MUR,$570 $48,$ $3,002 $2,963 $39 ROSE,$570,$1,237 $ $2,000 $1,500 $500 MHR,$581,$520,$ $949 $880 $69 NFX,$741,$650,$ $2,892 $3,694,$802 HES,$810,$970 $ $5,987 $5,798 $189 WLL,$1,153,$650,$ $5,629 $2,654 $2,975 PXD,$1,210,$731,$ $2,665 $2,653 $12 CLR,$1,361,$1,176,$ $5,998 $4,716 $1,282 APA,$2,419,$1,385,$1, $11,245 $9,725 $1,520 TOTALS $$10,482 $$5,577 $$4, $90,331 $83,363 $6,968 Stock&Ticker 2014&FCF 2013&FCF FCF&Change CF/CE Debt/Equity 2014&DEBT 2013&DEBT Debt&Change ECA $141 '$423 $ $7,813 $7,668 $145 UPL $100 $96 $ '19.73 $3,378 $2,470 $908 PQ $3 '$241 $ $425 $425 $0 XCO '$30 $30 '$ $1,447 $1,891 '$444 KWK '$116 '$153 $ '1.85 $2,038 $1,989 $49 GDP '$201 '$180 '$ $569 $486 $83 CRK '$234 '$262 $ $1,070 $799 $272 TLM '$242 '$696 $ $5,274 $5,540 '$266 COG '$243 '$170 '$ $1,752 $1,147 $605 BBG '$323 '$182 '$ $829 $984 '$155 RRC '$470 '$554 $ $3,073 $3,141 '$68 XEC '$489 '$248 '$ $1,500 $924 $576 SGY '$536 '$76 '$ $1,041 $1,027 $14 AR '$611 '$521 '$ $4,363 $2,079 $2,284 CHK '$673 '$1,962 $1, $11,555 $12,904 '$1,349 SD '$951 '$645 '$ $3,195 $3,195 $1 DVN '$1,007 '$1,322 $ $11,262 $12,022 '$760 APC '$1,042 $1,167 '$2, $15,092 $13,565 $1,527 SM '$1,063 '$277 '$ $2,366 $1,600 $766 QEP '$1,184 '$411 '$ $2,273 $3,107 '$834 NBL '$1,365 '$1,010 '$ $6,241 $4,887 $1,354 SWN '$5,006 '$344 '$4, $6,967 $1,950 $5,017 TOTALS A$15,541 A$8,383 A$7, A0.01 $93,522 $83,798 $9,724 Source: Company K Filings and The counterfeit shale revolu4on has been funded by debt, public offerings, bond sales and a variety of other sources of capital other than cash from opera4ons. Nega4ve free cash flow and growing debt characterized the balance sheets of most companies involved in shale plays before the recent drop in oil prices. Companies are chronically cash- flow nega4ve: outspend cash flow by 25% (4ght oil) and 32% (shale gas). Unmanageable debt that can never be paid from cash flow & must be con4nually re- financed. The E&P business has become financialized the only measure is produc4on- reserve growth. The appeal is the rela4vely short- term ROCE compared with deep- water, etc. Slide 7

8 Over- produc4on Of Shale Gas & Tight Oil Has Destroyed Prices WTI$Crude$Oil$and$Natural$Gas$Liquids$Prices$ U.S.%Natural%Gas%&%Propane%Prices% NGPL# WTI# #Naural#Gas#Henry#Hub# Propane#Mont#Bellvieu# $18# $120# $14# $2# Natural$Gas$Liquids$Price$(Dollars$Per$MMBTU)$ $16# $14# $12# $10# $8# $6# $4# $2# $100# $80# $60# $40# $20# WTI$Crude$OIl$Price$(Dollars$Per$Barrel)$ Henry%Hub%Dollars%Per%MMBTU% $12# $10# $8# $6# $4# $2# $2# $2# $1# $1# $1# $1# $1# Mont%Bellviieu%Dollars%Per%Gallon% Jan,2009# Mar,2009# May,2009# Jul,2009# Sep,2009# Nov,2009# Jan,2010# Mar,2010# May,2010# Jul,2010# Sep,2010# Nov,2010# Jan,2011# Mar,2011# May,2011# Jul,2011# Sep,2011# Nov,2011# Jan,2012# Mar,2012# May,2012# Jul,2012# Sep,2012# Nov,2012# Jan,2013# Mar,2013# May,2013# Jul,2013# Sep,2013# Nov,2013# Jan,2014# Mar,2014# May,2014# Jul,2014# Sep,2014# Nov,2014# Jan,2015# Jan,2008# Apr,2008# Jul,2008# Oct,2008# Jan,2009# Apr,2009# Jul,2009# Oct,2009# Jan,2010# Apr,2010# Jul,2010# Oct,2010# Jan,2011# Apr,2011# Jul,2011# Oct,2011# Jan,2012# Apr,2012# Jul,2012# Oct,2012# Jan,2013# Apr,2013# Jul,2013# Oct,2013# Jan,2014# Apr,2014# Jul,2014# Oct,2014# Jan,2015# Source: EIA Source: EIA Prices of natural gas, natural gas liquids, crude oil and propane have been progressively destroyed by over- produc4on of shale gas and 4ght oil. The behavior is conscious and inten4onal because produc4on and reserve growth are the only support for stock prices and, therefore, company asset value. Companies con4nue to produce oil and gas at sub- commercial prices despite the value implica4ons for investors. Slide 8

9 Current Oil Price Crisis Because of Oil- Supply Surplus & Demand Destruc4on 25" EIA'Top'15'Liquids;Producing'Countries' Millions'of'Barrels'of'LIquids'Per'Day' 20" 15" 10" 5" 0" U.S.'&'Canada'Oil'ProducEon' Jan)11" Feb)11" Mar)11" Apr)11" May)11" Jun)11" Jul)11" Aug)11" Sep)11" Oct)11" Nov)11" Dec)11" Jan)12" Feb)12" Mar)12" Apr)12" May)12" Jun)12" Jul)12" Aug)12" Sep)12" Oct)12" Nov)12" Dec)12" Jan)13" Feb)13" Mar)13" Apr)13" May)13" Jun)13" Jul)13" Aug)13" Sep)13" Oct)13" Nov)13" Dec)13" Jan)14" Feb)14" Mar)14" Apr)14" May)14" Jun)14" Jul)14" Aug)14" Sep)14" Oct)14" Nov)14" Dec)14" US"&"Canada" United"States" Russia" Saudi"Arabia" China" Canada" Iraq" Mexico" Iran" UAE" Brazil" Kuwait" Venezuela" Nigeria" Norway" Angola" Source: EIA Over- produc4on of 4ght oil in the U.S. is the principal cause of the global collapse in crude oil prices that began in Current price slump will slow produc4on & increase demand due to low prices. Slide 9

10 Tight Oil Produc4on Has Begun to Decline Tight$Oil$New$Producing$Wells$Added$&$WTI$Price$ Eagle#Ford# Bakken# Permian# WTI#Price# New$Producing$Wells$ 400# 350# 300# 250# 200# 150# 100# 50# WTI$Price$ $100# $90# $80# $70# $60# $50# $40# $30# $20# $10# WTI$Crude$Oil$Price$(Dollars$Per$Barrel)$ 0# Sep014# Oct014# Nov014# Dec014# Jan015# Source: Baker Hughes and Drilling Info Oil produc4on has recently begun to decline but not because of decreased rig count. It is because cash flow at current oil prices is too low to complete most wells being drilled. Decreasing well comple4ons in the Bakken, Eagle Ford and Permian basin plays with decreasing WTI oil price. Slide 10

11 Rig Count is Irrelevant for Now Bakken'Rig'Count,'New'Wells'Predicted'From'Rig'Count'&'New'Wells' New"Wells"Predicted"From"Rig"Count" New"Wells" Lagged"Rig"Count" 250" 200" 180" 200" 160" 140" New'Producing'Wells' 150" 100" 120" 100" 80" Number'of'Ac,ve'Rigs' 60" 50" 40" 20" 0" Jun,13" Jul,13" Aug,13" Sep,13" Oct,13" Nov,13" Dec,13" Jan,14" Feb,14" Mar,14" Apr,14" May,14" Jun,14" Jul,14" Aug,14" Sep,14" Oct,14" Nov,14" Dec,14" Jan,15" 0" Source: Drilling Info and Baker Hughes Bakken spud to first produc4on is about 5 months; 3 months for Eagle Ford & Permian: not a factor yet in decreased produc4on. Correla4on of rig count and well comple4ons is poor. Well comple4ons based on operator decisions, service company schedules, regula4ons and economics. Rig count based on long- term contracts. Slide 11

12 Correla4on Between New Producing Wells and Produc4on Growth Bakken&Monthly&Produc0on&Change&&&Produc0on&Change&Predicted&From&New&Wells& ProducDon"Predicted"From"New"Wells"Added" Actual"ProducDon" Oil"ProducDon" 80,000" 1,400,000" 60,000" 1,200,000" Monthly&Produc0on&Change&(Baarresl&of&Oil&Per&Day)& 40,000" 20,000" 0" )20,000" Jun)13" Jul)13" Aug)13" Sep)13" Oct)13" Nov)13" Dec)13" Jan)14" Feb)14" Mar)14" Apr)14" May)14" Jun)14" Jul)14" Aug)14" Sep)14" Oct)14" Nov)14" Dec)14" Jan)15" 1,000,000" 800,000" 600,000" 400,000" Bakken&Oil&Produc0on&(Barrels&of&Oil&Per&Day)& )40,000" 200,000" )60,000" Source: Drilling Info and Baker Hughes 0" Correla4ng between number of producing wells added each month and corresponding produc4on growth is poor. Calls into ques4ons the claims and logical arguments about drilling efficiency and produc4vity.. Slide 12

13 The Produc4on Decline Has Begun Bakken'Produc8on'&'New'Well'Model'' New"Producing"Wells" Oil"ProducHon" 1,200,000" Data' Forecast' 250" 1,150,000" Oil'Produc8on'(Barrels'Per'Day)' 1,100,000" 1,050,000" 1,000,000" 950,000" 900,000" Oil'Produc8on'(lhs)' C305,000'bopd'' Jan'2016' 200" 150" 100" 50" Number'of'Producing'Wells'Added'Per'Month' By#July#1 Total By EF.136, ,000 Sep.15 BK.165, ,000 Jan.16 PM.60,000 92,000 Dec.15 TOTAL.361, , ,000" 800,000" Aug,14" Sep,14" Oct,14" Nov,14" Dec,14" Jan,15" Feb,15" Mar,15" Apr,15" May,15" Jun,15" Jul,15" Aug,15" Sep,15" Oct,15" Nov,15" Dec,15" Jan,16" Producing'Wells'Added' (rhs)' Feb,16" Mar,16" Apr,16" May,16" Jun,16" Jul,16" Aug,16" Sep,16" Oct,16" Nov,16" 0" Source: Drilling Info and January 2015 produc4on in Eagle Ford (EF), Bakken (BK) and Permian basin (PM) decreased 111,000 bopd because of decreased well comple4ons. Modeled decreased comple4ons using rig count decline as a guide. Suggests almost 400,000 bopd of produc4on decline in 4ght oil plays by July ,000 bopd decline possible by year- end Only con4nued prices below $60 per barrel through at least year- end 2015 will lead to market balancing. Slide 13

14 The Economics of Tight Oil From SEC Filings Whiting'Petroleum'Corp Total'BOE 15,000,000 Realized'Price'BOE $35.22 Net'Per'BOE C$54.44 $"Thousands $/mcfe Operating'Expense $166,365 $11.09 Production'Taxes $44,378 $2.96 G&A $43,980 $2.93 Interest'Expense $74,257 $4.95 Total'NonCCapital'Cost $328,980 $21.93 Capex $1,015,974 $67.73 Total'Costs $1,344,954 $89.66 Impairments $80,924 Carrizo'Oil'&'Gas Total'BOE 3,114,000 Realized'Price'BOE $32.13 Net'Per'BOE?$42.44 Continental)Resources Total)BOE 18,614,667 Realized)Price)BOE $31.65 Net)Per)BOE A$40.32 $"Thousands $/boe Operating)Expense $109,589 $5.89 Production)Taxes $48,362 $8.20 G&A $45,380 $2.46 Interest)Expense $75,063 $4.03 Total)NonACapital)Cost $278,394 $20.58 Capex $956,700 $51.39 Total)Costs $1,235,094 $71.97 Impairments $147,561 Pioneer'Natural'Resources Total'BOE 17,444,070 Realized'Price'BOE $29.63 Net'Per'BOE A$20.99 $"Thousands $/boe Operating'Expense $28,708 $9.22 Production'Taxes $7,051 $2.26 G&A $31,577 $10.14 Interest'Expense $18,196 $5.84 Total'Non?Capital'Cost $85,532 $27.47 Capex $146,678 $47.10 Total'Costs $232,210 $74.57 Impairments $Thousands $/boe Operating'Expense $205,000 $11.75 Production'Taxes $39,000 $2.24 G&A $82,000 $4.70 Interest'Expense $46,000 $2.64 Total'NonACapital'Cost $372,000 $21.33 Capex $511,000 $29.29 Total'Costs $883,000 $50.62 Impairments $138,000 Source: Company Q Filings and Whi4ng a pure Bakken player; Con4nental a Bakken and SCOOP player; Carrizo an Eagle Ford player; Pioneer a Permian and Eagle Ford player. Basic costs are $50- $90 per barrel for players in key 4ght oil plays. These costs only reflect Q and are spread across all produc4on from other periods. They do not include sunk costs or write- downs. They aren t discounted. They represent a minimum break- even price. Slide 14

15 The Economics of Tight Oil From Comple4on Declines Bakken$New$Producing$Wells$&$WTI$Price$ Eagle$Ford$New$Producing$Wells$&$WTI$Price$ New#Producing#Wells# WTI#Price# New#Producing#Wells# WTI#Price# 250# WTI$Price$ $115# $110# $105# $100# 400# 350# WTI$Price$ $115# $110# $105# $100# Number$of$New$Producing$Wells$(2$Month$Moving$Average)$ 200# 150# 100# 50# $85$BreakHEven$Price$ $95# $90# $85# $80# $75# $70# $65# $60# $55# $50# $45# $40# $35# $30# $25# $20# WTI$Crude$Oil$Price$(Dollars$Per$Barrel)$ Number$of$New$Producing$Wells$(2$Month$Moving$Average)$ 300# 250# 200# 150# 100# $75$BreakJEven$Price$ $95# $90# $85# $80# $75# $70# $65# $60# $55# $50# $45# $40# $35# $30# $25# $20# WTI$Crude$Oil$Price$(Dollars$Per$Barrel)$ $15# $10# 50# $15# $10# $5# $5# 0# Apr014# May014# Jun014# Jul014# Aug014# Sep014# Oct014# Nov014# Dec014# Jan015# 0# Apr014# May014# Jun014# Jul014# Aug014# Sep014# Oct014# Nov014# Dec014# Jan015# 250# Permian$"Shale"$New$Producing$Wells$&$WTI$Price$ New#Producing#Wells# WTI#Price# WTI$Price$ $115# $110# $105# $100# Decreased comple4ons suggest $75- $85 per barrel break- even price. Number$of$New$Producing$Wells$(2$Month$Moving$Average)$ 200# 150# 100# 50# $85$BreakJEven$Price$ $95# $90# $85# $80# $75# $70# $65# $60# $55# $50# $45# $40# $35# $30# $25# $20# WTI$Crude$Oil$Price$(Dollars$Per$Barrel)$ $15# $10# $5# 0# Apr014# May014# Jun014# Jul014# Aug014# Sep014# Oct014# Nov014# Dec014# Jan015# Source: Drilling Info and EIA. Slide 15

16 The Simple Explana4on for the Current Oil Price Collapse: Supply Surplus World&Liquids&Supply&and&Demand&July&2013DFebruary&2015& Supply# Demand# Brent#Price# 25" EIA'Top'15'Liquids;Producing'Countries' 95# $120# U.S.'&'Canada'Oil'ProducEon' US"&"Canada" Millions&of&Barrels&of&Liquids&Per&Day& 94# 93# 92# 91# 90# 89# Supply&<&Demand& Supply&>&Demand& $100# $80# $60# $40# $20# Brent&Crude&OIl&Price&(Dollars&Per&Barrel)& Millions'of'Barrels'of'LIquids'Per'Day' 20" 15" 10" 5" United"States" Russia" Saudi"Arabia" China" Canada" Iraq" Mexico" Iran" UAE" Brazil" Kuwait" Venezuela" Nigeria" Norway" Angola" 88# Jul/13# Aug/13# Sep/13# Oct/13# Nov/13# Dec/13# Jan/14# Feb/14# Mar/14# Apr/14# May/14# Jun/14# Jul/14# Aug/14# Sep/14# Oct/14# Nov/14# Dec/14# Jan/15# Feb/15# 0" Jan)11" Feb)11" Mar)11" Apr)11" May)11" Jun)11" Jul)11" Aug)11" Sep)11" Oct)11" Nov)11" Dec)11" Jan)12" Feb)12" Mar)12" Apr)12" May)12" Jun)12" Jul)12" Aug)12" Sep)12" Oct)12" Nov)12" Dec)12" Jan)13" Feb)13" Mar)13" Apr)13" May)13" Jun)13" Jul)13" Aug)13" Sep)13" Oct)13" Nov)13" Dec)13" Jan)14" Feb)14" Mar)14" Apr)14" May)14" Jun)14" Jul)14" Aug)14" Sep)14" Oct)14" Nov)14" Dec)14" Source: EIA Source: EIA In the 2 nd half of 2013, world liquids demand exceeded supply. Beginning in 2014, supply exceeded demand because of surging North American 4ght oil produc4on and weakening demand. The market lagged the signal by about 6 months and prices began to fall in June Slide 16

17 The Context For The Current Oil Price Crisis: Supply- Demand Fundamentals Rela8ve#Surplus#or#Deficit# Brent#Price# Millions,of,Barrels,of,Liquids,Per,Day,(2,MMA), 4# 3# 2# 1# 0# )1# Jan)03# May)03# Sep)03# Jan)04# May)04# Global,Peak,of, Deep,Water, Sep)04# Jan)05# May)05# Sep)05# Jan)06# May)06# Sep)06# Low, OPEC, Spare, Capacity, Jan)07# May)07# Global,Financial, Collapse, Sep)07# Jan)08# May)08# Sep)08# Jan)09# May)09# Onset,of, Tight,Oil, Sep)09# Jan)10# May)10# Sep)10# Arab, Spring, Jan)11# May)11# Sep)11# Jan)12# May)12# Sep)12# Jan)13# May)13# Sep)13# Jan)14# 2014,Oil, Price, Collapse, May)14# Sep)14# Jan)15# $160# $140# $120# $100# $80# $60# $40# CPI$Adjusted,Brent,Price,(Dollars,Per,Barrel), )2# )3# Rising,Prices,Despite, Supply,Surplus, OPEC,Cut, China, mmbpd, Demand, Expansion, Longest,Period,of,Sustained,High, Oil,Prices,in,History, $20# Source: EIA Oil prices rela4vely insensi4ve to supply- demand fundamentals below ~$90/barrel. In 2004, the rela4ve supply surplus reached 1.94 mmbpd & in 2005, it reached 4.1 mmbpd but oil prices con4nued to rise: oil was less than $75/barrel. Greatest rela4ve surplus in the current episode was 1.7 mmbpd but average price from Nov 2010 Oct 2014 was $91 and was more than $100 for 18 months. Slide 17

18 The Context For The Current Oil Price Crisis: Demand Destruc4on World,Liquids,Consump=on,Percent,of,Produc=on, Consump<on#Percent# CPI.Adjusted#WTI#Price# 104%# Increasing,Demand, Decreasing,Demand, $160# 102%# $140# Consump=on,Percent,of,Produc=on, 100%# 98%# 96%# 94%# 92%# Apr.03# Aug.03# Dec.03# Apr.04# Aug.04# Dec.04# Apr.05# Aug.05# Dec.05# Apr.06#,September,2007, Aug.06# Dec.06# Apr.07# Aug.07# Dec.07# Apr.08# Aug.08# Dec.08# Apr.09# Aug.09# Tight,Oil,Produc=on, Growth,Began,in, Earnest,When,Oil, Prices,Exceeded,$90, November,2011, Dec.09# Apr.10# Aug.10# Dec.10# Apr.11# Aug.11# Dec.11# Apr.12# Aug.12# Dec.12# Apr.13# Aug.13# Dec.13# Apr.14# Aug.14# Dec.14# $120# $100# $80# $60# $40# $20# CPI$Adjusted,WTI,Oil,Price,(Dollars,Per,Barrel), Source: EIA Demand generally increased un4l September 2007 and decreased a\er Tight oil produc4on began in earnest in CPI- adjusted WTI oil price passed $90/barrel in November Slide 18

19 : The Longest Period of High Oil Prices in History in Real Dollars Oil,Prices,in,2015,Dollars, CPI$Adjusted,WITCrudeOil,Price,(Dollars,Per,Barrel), $160# $140# $120# $100# $80# $60# $40# 1974,Arab,, Oil,Embargo, Sept,1979$Sept,1981:, 26,months, 2008,Financial,, Crisis, Sept,2007$Sept,2008:, 13,months, Nov,2010$ Sept,2014:, 33,months, $20# 1979,Iran$Iraq,War, 2005,Peak,of,ConvenSonal,Oil,, &,Prices,Exceed,$60, Jan,70# Mar,71# May,72# Jul,73# Sep,74# Nov,75# Jan,77# Mar,78# Source: EIA and Federal Reserve Board May,79# Jul,80# Sep,81# Nov,82# Jan,84# Mar,85# May,86# Jul,87# Sep,88# Nov,89# Jan,91# Mar,92# May,93# November 2010 September 2014 was the longest period of oil prices > $90 per barrel ever (all prices in 2015 U.S. Dollars. Probably created demand destruc4on as occurred in a\er 1981 and Oil prices were depressed for almost 20 years a\er Oil prices rebounded in a year a\er Jul,94# Sep,95# Nov,96# Jan,98# Mar,99# May,00# Jul,01# Sep,02# Nov,03# Jan,05# Mar,06# May,07# Jul,08# Sep,09# Nov,10# Jan,12# Mar,13# May,14# Slide 19

20 The Larger Concern About Demand & The Global Economy U.S.$Real$GDP$Growth$ GDP$Growth$ Linear$(GDP$Growth)$ Produc4vity# WTI# Linear#(Produc4vity)# 8%$ 4.0# $120# GDP$Growth$Rate$Percent$ 7%$ 6%$ 5%$ 4%$ 3%$ 2%$ 1%$ 3.5# 3.0# 2.5# 2.0# 1.5# 1.0# $100# $80# $60# $40# CPI$Adjusted,WTI,Oil,Price,(March,2015,Dollars), 0%$ 1984$ 1985$ 1986$ 1987$ 1988$ 1989$ 1990$ 1991$ 1992$ 1993$ 1994$ 1995$ 1996$ 1997$ 1998$ 1999$ 2000$ 2001$ 2002$ 2003$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ 2014$ 2015$ 0.5# $20#!1%$!2%$ Source: U.S. Bureau of Labor Sta4s4cs 0.0# 1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014# Source: U.S. Bureau of Labor Sta4s4cs and EIA Decreasing GDP and labor produc4vity growth in the U.S. over the last 30 years suggest long- term deteriora4on in economic condi4ons in the U.S. Complex causes but suggest slowing growth. A troubling backdrop to the present oil- price collapse. OPEC and EIA forecast lower oil prices for the next decade. Slide 20

21 The Financializa4on of the Explora4on & Produc4on Business Interest$Rate$ 7%# 6%# 5%# 4%# 3%# 2%# 1%# Federal$Funds$Interest$Rates$January$2000>January$2015$ $160# $140# $120# $100# $80# $60# $40# $20# WTI$Oil$Price$January$2015$US$Dollars$ Easy credit feeds our love of immediate gra4fica4on, distorts self- regula4on, crea4ng a destabilizing posi4ve- feedback loop that dominates the calculus of risk. - - Peter Wybrow, WSJ May 11, %# Jan000# Jun000# Nov000# Apr001# Sep001# Feb002# Jul002# Dec002# May003# Oct003# Mar004# Aug004# Jan005# Jun005# Nov005# Apr006# Sep006# Feb007# Jul007# Dec007# May008# Oct008# Mar009# Aug009# Jan010# Jun010# Nov010# Apr011# Sep011# Feb012# Jul012# Dec012# May013# Oct013# Mar014# Aug014# Jan015# Source: EIA and Federal Reserve Board In a zero- interest world, where could reasonably secure yields be found? Investment banks iden4fied the U.S. E&P business as the solu4on. Yields for corporate junk bonds, preferred stock and other capital instruments in the range of 6-10% interest. In the United States and backed by a hard asset in the ground. E&P companies became the sub- prime deriva4ve of the post- Financial Crisis period. Shale gas and later, 4ght oil companies had access to almost infinite capital with no performance requirement other than to avoid debt covenants. Slide 21

22 The Problem With The Counterfeit Shale Revolu4on The story stresses success based on resource es4mates but not reserves. Produc4on volumes but not the cost of that produc4on. The benefits of technology but not its price. Claims of profit that exclude important expenses. The government and press accept this story because it paints a picture that fulfills so many aspira4ons of energy independence, U.S. re- emerging poli4cal strength, dominance in energy affairs and economic growth. Warning signs of poten4al risk have so far been ignored. Slide 22

23 The Counterfeit Shale Revolu4on Concluding Observa4ons Shale plays have been mis- represented as providing cheap and abundant oil and natural gas supply. The current oil- price collapse is because of expensive unconven4onal oil and the market s inability to support its cost. $90 per barrel appears to be threshold for demand destruc4on. Only the core of the core areas of the best 4ght oil plays are profitable at oil prices around $70 per barrel. Shale gas plays have never been commercial since prices collapsed in 2008 but have been propped up by easy money based on zero- interest rates. Easy money has also funded zombie 4ght oil plays and companies. The present oil- price collapse is severe because of the accumulated, long- term price fa4gue since late 2007 and longer- term economic considera4ons. The key to recovery is demand low price will cure demand but it may take a long 4me. The effect of reduced E&P spending on the U.S. economy is unclear and could reduce demand by slowing the weak economic recovery. Con4nued non- commercial over- produc4on will subside faster than most imagine especially a\er 1 st Quarter 2015 earnings reports. Capital availability for the counterfeit shale plays will be an important factor in how long low oil prices persist. Slide 23