Shale Gas exploration and development: An operator’s perspectiveCanadian Shale Gas Workshop- BrusselsAndrew Quarles – General Manager Europe Unconventional

22 Jan 2013

2

Summary

• Who is Nexen?

• Shale Gas exploration and development: a lengthy and uncertain endeavor• Not all shale gas plays are the same

• Timing and cost

• Shale Gas Operators can and need to be good neighbors• What does development look like?

• An example of community engagement

• Environmental stewardship

3

Nexen Overview

• Headquartered in Calgary, Canada

• 3,800 employees in 7 countries

• 185,000 – 220,000 boe/d production in 2012

• $30 to $46 /boe netbacks

• $2.8 - $3.2 billion in cash flow

• 28 exploration wells planned for 2012

• 10 billion boe of resource to develop

85% OIL

15% GAS

4

Nexen’s Global Portfolio

CanadaOil sands SAGDShale gas

Gulf of MexicoOffshore deep water

ColombiaConventional oilShale gas

NigeriaOffshore deep water

UK North SeaOffshore2nd largest producer

PolandProspective Shale gas

YemenConventional +20 years

Nexen’s Canadian Shale Gas Experience

____________________Resource Potential Estimate Source: Wood Mackenzie.

SAN JOAQUINBASIN

McClure

SANTA MARIABASIN

Monterey

UINTABASINBaxter

MancosPICEANCE

BASIN

PARADOXBASIN

Cane Creek

SAN JUANBASIN

MancosLewis BLACK WARRIOR BASIN

FloydConasuaga

Neal

BIG HORNBASINMowry

WILLISTONBASINBakken

BRITISH COLUMBIA/ALBERTAMontney

MICHIGANBASINAntrim

DELAWARE BASINBarnett

Woodford

BRITISH COLUMBIAHorn River

Muskwa

ARKOMA/ARDMORE BASINFayettevilleWoodford

Caney

Utica

Potential LNG Facility

North American Unconventional Resource Plays

Marcellus Shale: 197 Tcfe

Haynesville Shale: 140 TcfeEagle Ford Shale: 10 Tcfe

Barnett Shale: 61 Tcfe

Fayetteville Shale: 26 Tcfe

Montney: 55 Tcfe

NEBC Shales (Horn River: 104 Tcfe)

APPALACHIANBASIN

MarcellusHuron

Horn River Basin: Top Quartile Shale Play in North America

Third largest resource play in North America

500 net foot interval

High silica content shale is very brittle and fracable

Attractive tax regime and royalty structure

Competitive resource recovery (EUR) with 6 – 15 Bcf wells

Viable North American LNG export option

Woodford Shale: 12 Tcfe

Nexen NEBC Basin Acreage: ~300,000 gross acres

Not All Shale Gas Plays Are The Same

• There are a wide variety of shale plays. Less than half are economic

• The expensive and time consuming challenge to determine where one is located on this spectrum

Lengthy Process to Explore and Appraise

• A stepwise semi-decadal approach through exploration and appraisal… • Resource- defining and characterizing a viable play concept; • Flow rate– cracking the nut leading to cost effective reservoir productivity;• Commercial- demonstrate that gas can be produced cost effectively through

pilot programs

30+

How to get the most gas usingthe least frac water & proppant ? How to get the most gas usingthe least frac water & proppant ?

What to put on the books ?What to put on the books ?

Deliverability and EUR for each well ?Deliverability and EUR for each well ?

How important are naturalFractures ?How important are naturalFractures ?

How many frac stages & how far apart ?How many frac stages & how far apart ?

Where should laterals be placed ?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 ?Best flowback practices to enhance performance ?

Planar bi-wingor complex fracs ?Planar bi-wingor complex fracs ?

Is there a sweet spotin the reservoir ?Is there a sweet spotin the reservoir ?

The Shale Gas Development Challenge: Above and Below the Surface

How much infrastructure and when to expand ?How much infrastructure and when to expand ?

Market contracts and takeaway capacity ?Market contracts and takeaway capacity ?

How to reliably assess to services?How to reliably assess to services?

How much free & absorbed gas ?How much free & absorbed gas ?

How much is it going to cost ?How much is it going to cost ?

Shale Gas Operations are not “Get Rich Quick”

• Significant upfront investment for exploration and appraisal

• Stable long term cashflow with “manufacturing style” development investments

• Long payout periods with a cashflow that is sensitive to discounting

AN

NU

AL

CA

SH

FL

OW

/ C

AP

ITA

L ($

Bill

ion

) -

BA

RS

CU

MU

LA

TIV

E N

ET

CA

SH

FL

OW

($B

illion

) - LIN

E

(0.6)

(0.4)

(0.2)

-

0.2

0.4

0.6

0.8

1.0

1.2

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

(3.75)

(2.50)

(1.25)

-

1.25

2.50

3.75

5.00

6.25

7.50

Cash Flow Capital Cumulative CF

Manufacturing Style Development

Explore and Appraise

Representative Cash Flow of a Successful Shale Gas Project

Multi-Well Pad Design Minimizes Impact

• Minimize surface footprint (5%) – environment and cost benefits

• Optimize well placement – stratigraphic placement

• Optimize wells spatiallyto maximize recovery

10

3-5 Square miles of reservoir developed from a single drilling pad

Central Well Pad: 880‘ x 575‘

Footprint Management: Drilling C-1-J Pad, NE BC

MARCH 2011

N

Footprint Management: Completions C-1-J Pad, NE BC

JULY 2011

N

Footprint Management: Production Phase Reclamation

AUG 2012

N

Stakeholder Engagement

Stakeholders• First Nations• Regulators• Local, Regional, & Provincial Gov.• Industry Peers

14

Stakeholder Concerns

Environmental Impacts• Surface & Grd. Water, Wildlife &

Species @ Risk, Footprint Mgmt

Social Interests• Infrastructure Capacity, Treaty Rights

Economic Opportunities• Local Employment and Services

Through the Identification of stakeholders and understanding key concerns, we are able to effectively focus our engagement efforts towards facilitating meaningful discussion and open transparency.

Engagement Activities

Ensuring a Positive Local Economic Impact

0%

10%

20%

30%

40%

50%

60%

70%

80%

2008 2009 2010 2011

Outside BC

Other BC

Fort Nelson

Contracted Vendors in NEBC for SG Development

16

Multi-year regional caribou inventory with First Nation participation

100 11485

749

293

407

129

581

49

246

172

15976

1843

124

Managing Environmental Impacts

Nexen’s leadership with governance structure for implementing BC Research and Management of Boreal Caribou (Spp @ Risk)

Regional Wildlife Research – Collaboration

Footprint Management: Production Phase Reclamation

AUG 2012

N