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

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

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

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

5. Production Costs – Marginal Oil Supply Fantazzini, et al. Global marginal cost of production 2008. Source: LCM Research based on Booz Allen/IEA data (Morse, 2009). OPEC ME FSU EOR

6. 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

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

8. Bakken Oil Well and Field Decline Rates

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

11. 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

12. 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

13. Conclusion: We are navigating a narrow Supply/Demand ledge