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Creating Clarity and Certainty for Shale Gas Development A British Columbia Example Shad Watts – Community Consultation & Regulatory Affairs Nexen NEBC.

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Presentation on theme: "Creating Clarity and Certainty for Shale Gas Development A British Columbia Example Shad Watts – Community Consultation & Regulatory Affairs Nexen NEBC."— Presentation transcript:

1 Creating Clarity and Certainty for Shale Gas Development A British Columbia Example Shad Watts – Community Consultation & Regulatory Affairs Nexen NEBC Shale Gas May 17, 2012

2 Agenda Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity Tenure Acquisition Fiscal Incentives Effective & Efficient Regulation Shale Gas Case Study

3 Nexen Asset Positioning 2 ____________________ Resource Potential Estimate Source: Wood Mackenzie. SAN JOAQUIN BASIN McClure SANTA MARIA BASIN Monterey UINTA BASIN Baxter Mancos PICEANCE BASIN PARADOX BASIN Cane Creek SAN JUAN BASIN Mancos Lewis BLACK WARRIOR BASIN Floyd Conasuaga Neal BIG HORN BASIN Mowry WILLISTON BASIN Bakken BRITISH COLUMBIA/ ALBERTA Montney MICHIGAN BASIN Antrim DELAWARE BASIN Barnett Woodford BRITISH COLUMBIA Horn River Muskwa ARKOMA/ARDMORE BASIN Fayetteville Woodford Caney Utica Northeast British Columbia Potential LNG Facility North American Unconventional Resource Plays Marcellus Shale: 197 Tcfe Haynesville Shale: 140 Tcfe Eagle Ford Shale: 10 Tcfe Barnett Shale: 61 Tcfe Fayetteville Shale: 26 Tcfe Montney: 55 Tcfe NEBC Shales (Horn River: 104 Tcfe) APPALACHIAN BASIN Marcellus Huron Horn River Basin: Top Quartile Shale Play in North America Third largest resource play in North America 500 net foot interval averages 50% thicker than the Barnett High silica content shale is very brittle and fracable 10+ year land tenure with minimal drilling required to hold Attractive tax regime and royalty structure Competitive resource recovery (EUR) with 6 – 15 Bcf wells Viable North American LNG export option Ideally located to supply growing oil sands demand Cordova Embayment extends platform Nexen Ownership Summary ~172,000 acres in Horn River and Cordova ~128,000 acres in Liard 60% working interest 100% operated Ownership in Cabin Gas Plant Woodford Shale: 12 Tcfe Takeaway Capacity Spectra Plant 100 MMcf/d Cabin Gas Plant 5% Nexen WI in Phase MMcf/d gross processing capacity Expected online mid % Nexen WI in Phase MMcf/d gross processing capacity Shale Gas Overview

4 4 Northeast British Columbia

5 STAGES OF SHALE GAS EXPLORATION AND DEVELOPMENT A stepwise approach through exploration and appraisal… Technical feasible – defining and characterising the a viable play concept; Commercial feasiblity – cracking the nut leading to cost effective reservoir productivity; Commercial demonstration through pilot programs prior to project sanction 30+

6 6 Development Requirements NEBC 1. Permanent Roads and year round access. 2. Well pads with many (8-20) horizontal wells One pad per 3 square miles. Triple Drill Rigs ( 5000m ); self moving Surface footprint only 5-10% of traditional equivalent vertical well development Innovative application of technology to reduce development costs. 3. Completion (fracing) of Horizontal Wells fracs per well. 3+ fracs per day. exclusively slick water* fracs. typically tonnes sand per frac ( 2-4 railcars ). 4. Appropriate pipelines to and from the well pads *Slickwater or slick water fracturing is a method or system of hydro-fracturing which involves pumping water & sand with a friction reducer. Shale Gas Overview

7 7 5. In field Facilities / Gas Compression Dehydrate and compress gas Formation water filtration & disposal 6.Takeaway pipeline to Area Gas Plant(s) 7. Area Gas Plants that will further process the gas Remove CO 2 and trace H 2 S Compress to sales pipeline pressures 8. Sales pipeline to transport gas to market Development Requirements NEBC Shale Gas Overview

8 Horn River Basin – Drilling (18 well pad) Shale Gas Overview b-77-H/94-O-8 Pad 2011

9 Horn River Basin – Completions (9 well pad) c-1-J/94-O-8 Pad 2011 Shale Gas Overview

10 Distance to market Undeveloped local service sector / distance to services Lack of infrastructure and difficult surface access Understanding the reservoir Long time before positive return Shale Gas Overview Development Challenges NEBC

11 11 Shale Gas Overview Drilling = $127,687/day Completions = $640,693/day (excluding materials) Large upfront capital requirements Development Challenges NEBC

12 How to get the most gas using the least frac water & proppant ? How to get the most gas using the least frac water & proppant ? What to put on the books ? Deliverability and EUR for each well ? How important are natural Fractures ? How important are natural Fractures ? How many frac stages & how far apart ? Where should laterals be placed ? What is the best well spacing, length & orientation ? What is the best well spacing, length & orientation ? Best flowback practices to enhance performance ? Planar bi-wing or complex fracs ? Planar bi-wing or complex fracs ? Is there a sweet spot in the reservoir ? Is there a sweet spot in the reservoir ? THE SHALE GAS DEVELOPMENT CHALLENGE How much infrastructure and when to expand ? Market contracts and takeaway capacity ? How to reliably assess to services? How much free & absorbed gas ? How much is it going to cost ? Shale Gas Overview

13 Key Messages – What It Takes Quantitative – Below Ground Positive expected monetary values  Cumulative distribution of NPV that incorporates mitigation decision points and key subsurface risk and uncertainty ranges Acceptable risked capital levels Attractive success case valuation Qualitative – Above Ground Favorable fiscal terms and incentives that promote exploration and risk sharing Terms of tenure aligned with the “unconventional” timelines for exploration, appraisal and development Sanctity of contract Stable, streamlined, open and transparent regulatory structure Infrastructure to customer Liberalized gas market Political stability Secure and predictable operating environment Legitimate government consultation on regulation, terms and policy Shale Gas Overview

14 Agenda Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity Tenure Acquisition Fiscal Incentives Effective & Efficient Regulation Shale Gas Case Study

15 Oil & Gas Tenure Tenure Must Facilitate Responsible Development: Should stimulate work activity rather than be viewed as a revenue generation mechanism Clear definition of exclusive rights geographically Appropriate to resource developed in the term, and geographical extent Risk sharing through flexibility in commitments for work or cash in lieu with optionality for staged commitments related to market. Maintains competitiveness through market pricing with no minimum bids but don't have to award if less than fair award price 15 Certainty in Subsurface Rights

16 16 Exploratory effort is rewarded with the right to produce, delineation of a pool allows the tenure to be held beyond the end of its term Longer tenures are granted in areas with poorer infrastructure Oil and gas tenure grants the rights to the resource only - permitting of exploration and development activities is managed separately by an independent agency Unused rights return to the Crown at the end of the tenure term Principles of British Columbia’s Tenure System Oil & Gas Tenure Certainty in Subsurface Rights

17 Tenure Types in BC Drilling Licences (3, 4, or 5yr term) Exploration type of tenure Different terms depending on location Encourages Development Leases (5 or 10yr term) Production form of tenure Held in perpetuity 17 Certainty in Subsurface Rights

18 Agenda Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity Tenure Acquisition Fiscal Incentives Effective & Efficient Regulation Shale Gas Case Study

19 A SUCCESSFUL FISCAL REGIME Fiscal regime that shares risk / incents activity Provides long term certainty Enable accelerated capital cost recovery for capital intensive plays Facilitate resource development through access cost sharing in remote areas (roads and pipe) Incent zone specific production through target credits Recognize seasonal or operational constraints Shale Gas Case Study

20 20 British Columbia Targeted Royalty Programs Summer Royalty Program Conditions: Spud Date between April 01 & November 30 Deep Royalty Programs Deep Deep Discovery Deep Re-entry Conditions: Vertical Well Depth > 2500m Before Sep 1, 2009 Horizontal Well Depth > 2300m After Sep 1, 2009 Horizontal Well Depth > 1900m Marginal Royalty Program Conditions: 12 month average Rate < 80 mcf/d/100m Monthly Production below 880 mcf/d Ultra-Marginal Royalty Program Condition: 12 month average Rate < 40 mcf/d/100m Coalbed Methane Condition: Production < 600 mcf/d Infrastructure Royalty Credit Program Condition: By Request for Applications Net Profit Royalty Program Conditions: By Request for Applications BC’s Targeted Royalty Programs Fiscal Incentives

21 Impact of BC Royalty Programs 21 $1.3 billion in incremental royalties since 2004/05 21% increase in BC’s natural gas revenues Fiscal Incentives

22 Agenda Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity Tenure Acquisition Fiscal Incentives Effective & Efficient Regulation Shale Gas Case Study

23 Efficient and Effective Regulation Considers Operational requirements, risk, and technical considerations Built collaboratively Flexible Approvals received in a timely manner Incent desired practices Results based – focus on compliance

24 Government and Ministries Set Policy and Legislation Award Tenure Oil and Gas Commission Provides Permits & Approvals Compliance & Enforcement E.g. Oil and Gas Activities Act E.g. Drilling and Production Regulation Provincial Legislative Framework Effective & Efficient Regulation

25 Specified Enactments Land Act: Section 14 Temporary Occupation of Crown Land Section 39 Licence of Occupation Section 40 Right of Way Water Act: Section 8 Short Term Use of Water Section 9 Changes in and About a Stream Section 26 Permits over Crown Land Forest Act: Section 47 Master Licence to Cut Section 117 Road Use Permit Other Enactments: Section 12 Heritage Conservation Act Sections 9, 14 & 15 Environmental Management Act The BC Oil and Gas Commission serves as a “single window” agency provided with legislative authority for authorizations under several Acts. Effective & Efficient Regulation One Window Approach 25

26 26 Oil and Gas Activities Act (OGAA) More efficient approvals for multiple related activities Increased compliance and enforcement mechanisms Increased landowner/stakeholder support Increased environmental protections New appeal provisions Maintains specified enactments Oil and Gas Activities Act (OGAA) More efficient approvals for multiple related activities Increased compliance and enforcement mechanisms Increased landowner/stakeholder support Increased environmental protections New appeal provisions Maintains specified enactments Drilling & Production Regulation Environmental Protection & Mgmt Regulation Regulatory Framework Geophysical Exploration Regulation Administrative Penalties Regulation Consultation and Notification Regulation Regulatory Framework Pipeline Regulation Structure of OGAA Effective & Efficient Regulation

27 Project Lifecycle – What the Commission Regulates 6.Operations Risk based inspections Compliance Programs and Audits 2.Application First Nations Consultations Application Review 7.Abandonment / Reclamation Certificate of Restoration Process Orphan Fund 1.Pre-Application Consultation/Engagement by Industry with landowners, other stakeholders/First Nations and Government/Commission 3. Decision (21 days) Permit issued or declined with reasons Conditions attached as appropriate 4.Construction Inspections and Enforcement 5. Leave to Open/Production Review project to ensure it is compliant and ready to commence operations One Window Approach Effective & Efficient Regulation 27

28 28 Effective & Efficient Regulation Streamlined Application

29 29 Horizontal Wells Environmental Protection 20 Horizontal wells from one 260x175m pad Each frac stage in hz well is equivalent to a vert. well Would need 320 vertical wells Vertical wells each on a separate 100m x 100m pad Same amount reservoir contacted in both scenarios 85% less surface disturbance Vertical Wells Effective & Efficient Regulation

30 Environmental Protection Small Lake Complexes Collaborative effort bw industry and government Calf mortality decreases when selected Calf recruitment success increases Predators are avoiding/don’t select Lakes 1 ha – 10 ha within 200m proximity of each other 250m buffer applied 2000 meters Effective & Efficient Regulation 30

31 What is Water Used For? Road and well pad construction Drilling Well completions Transportation/pipelines 31 Oil and Gas Water uses – Shale Gas Effective & Efficient Regulation

32 32 Water requirements Nexen Horn River Basin: 1 pad per year1 pad per year frac stages per well, 20 wells per pad16-18 frac stages per well, 20 wells per pad Frac design:Frac design: 3300 m 3 per frac stage and drill-outs3300 m 3 per frac stage and drill-outs 60,000 m 3 per well x 20 wells per pad60,000 m 3 per well x 20 wells per pad tonnes frac sand per frac tonnes frac sand per frac Total annual requirement of ~1,200,000 m 3 of water & 80,000 – 140,000 tonnes of sandTotal annual requirement of ~1,200,000 m 3 of water & 80,000 – 140,000 tonnes of sand Effective & Efficient Regulation

33 Approximately 2500 metres below surface Potable Water Wells: < metres Surface casing Additional steel casing and cement to protect groundwater Protective Steel Casing Potable Groundwater Aquifers Hydraulically fractured shales Water Protection - Well Construction 33 Effective & Efficient Regulation

34 34 Licensed Withdrawal Variable withdrawal rates are designed to mimic seasonal variations in flow Flow Condition Instream Flow Range (2011) Withdrawal Parameter Flood Stage: 80% > inferred median > m 3 /s 25% of mean daily discharge High Flow: > inferred median – m 3 /s 15% of mean daily discharge Normal Flow: < inferred median – m 3 /s 10% of mean daily discharge Zero Withdrawal Limit < m 3 /s (30% of mean annual flow - ice free period) 0 Maximum Withdrawal Limit m 3 /year 34 Effective & Efficient Regulation

35 Conclusions Capital Intensive Development Governments and industry need to work together Different phases of development need to be recognized Focus on results based regulatory framework to enhance efficiency and flexibility


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