Sally Odland Scarsdale High School Teachers Workshop November 2013 Supply/Price Dynamics of Unconventional Petroleum Production

Oil prices more than tripled in the last decade, yet crude oil supply increased by only 7% Old Price Norm New Price Norm

Unconventional Oil from Texas and N Dakota has offset other US decline

Horizontal Drilling and Hydraulic Fracturing is the only reason that both US oil & gas production are not in decline

Production Costs – Marginal Oil Supply Fantazzini, et al. Global marginal cost of production Source: LCM Research based on Booz Allen/IEA data (Morse, 2009). OPEC ME FSU EOR

Shale and tight reservoir plays are ‘high-hanging fruit’ Disseminated oil and gas, i.e. not concentrated Low permeability - the petroleum doesn’t flow Rock must be ‘stimulated’ to release the HCs Well production rates are much lower than conventional reservoirs Ultimate recovery much lower than conventional reservoirs (2-8% v 35-40% of original oil in place) Decline rates are much steeper

Total recovery is smaller and decline rate faster in unconventional oil fields

Bakken Oil Well and Field Decline Rates

Flaring of Uneconomic Gas – Bakken Formation, N.D.

Market Dynamics Dry gas drilling in US largely uneconomic at recent prices of $2 - $4 MMbtu. Glut keeps price down. Rigs switching to oil and ‘wet gas’ with NGLs Power plants switch from coal to gas around $4 US nat gas prices (<$4) is less than ½ Europe’s price ($10-$12) and ¼ of Asia’s ($15-18) Pressure for LNG export terminals

Supply/Demand Balance is Resolved by Price Price is set at the margins FLOOR: Cost to produce the next barrel or mcf Oil: Deepwater ? Tar Sands ? Shale Oil? Gas: Horizontal drilling, fracking, water, regs CEILING: Price the marginal consumer is willing to pay for an additional barrel. What price will the Seller/Exporter accept? Can decide to leave in ground for the future

Conclusion: We are navigating a narrow Supply/Demand ledge