Impacts of shale on Argentina’s labor, infrastructure and raw materials marketsAlex Fleming, Senior Manager, Ernst & Young LLPOil & Gas Advisory, Performance Improvement

Page 2

The US was caught off guard by the shale revolution, which caused significant negative impact and “bullwhip” behavior in supply chains

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

200000002100000022000000230000002400000025000000260000002700000028000000290000003000000031000000

15

17

19

21

23

25

27

29

Natural gas gross width Crude oil production

Tcf

Tbbl

US domestic O&G production

Sources: US Bureau of Labor Statistics, US Energy Information Administration, Spears Oilfield Market Report 2014, India NCDEX Price History

Shale

0

20

40

60

80

100

120

012345678910

OilNG

US$/

bbl

US$/

Mbt

u

Price of oil (WTI) and natural gas (Henry Hub)

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

5000

10000

15000

20000

25000

30000

35000

40000

Hydraulic fracturing Directional drilling Specialty chemical

Key unconventional services market size

Jan-0

8

Jun-0

8

Nov-08

Apr-0

9

Sep-09

Feb-1

0Ju

l-10

Dec-10

May-1

1

Oct-11

Mar-1

2

Aug-1

2

Jan-1

30

500

1000

1500

2000

2500

Guar Spot Price (NCDEX) 2002=100

per

100

kg

Sample guar price index (India NCDEX Spot Quotes)

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Towns, regions and suppliers are still playing “catch-up” to make shale sustainable and reduce impact

Bakken in North Dakota and Wyoming

Eagle Ford in Texas

Marcellus & Utica in Pennsylvania, Ohio, West Virginia

Sources: US Energy Information Administration, listed publications

“State and local officials are struggling to get their bearings in the midst of problems ranging from acute housing and labor shortages to rapidly increasing demands on public services.” – 1 Oct. 2013, National conference of state legislatures

“In Williston, the quiet open prairie has turned into an industrial zone. Thousands of trucks used for drilling operations rumble along roads built for far less traffic. The lack of housing forces many newcomers to live in cars and campers. Grocers can't keep shelves stocked. Police, firefighters, hospital workers, trash collectors and teachers are overburdened.” – 1 June 2013, HR Magazine

“… drilling waste hauling and disposal worries have overshadowed the economic boom that oil and gas activity has brought to the South Texas region …” – 10 July 2013, NGI Shale Daily

“Nueces County is vying for a slice of the multimillion dollar fund Texas lawmakers set aside to help counties with roads damaged by oil field traffic.” – 18 Dec. 2013, Corpus Christi Caller-Times

“Roads in the Eagle Ford Shale are under intense pressure from the voluminous truck traffic that now runs up and down South Texas highways — literally hundreds of trips per day on many of them. What is becoming apparent is that there is a disconnect in the Texas political economy between how tax revenues are generated and how roads are then funded.” – 24 Oct. 2013, San Antonio Business Journal

“The problem has been finding enough workers …” – 2 Aug. 2013, SA Express News

“New York’s cities and towns can block hydraulic fracturing within their borders, the state’s highest court ruled.”– 30 June 2014, Bloomberg

“As of April 2011, only 15 sewage treatment plants statewide were accepting flowback water. That same month, DEP asked drilling companies to stop bringing frack water for treatment at these facilities because of mounting water quality concerns.” – April 2011, Penn State

“Major companies have announced the intent to pursue cracker facilities in this region … a major refining operation has been reborn, and LNG export facilities are on the table. And all this has thrown off tremendous infrastructure development work … generating business for local industries, including steel, specialty chemicals and materials, sophisticated process equipment and the high-tech research.” – 23 June 2014, Metropolitan corporate counsel

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The impact of shale development manifests itself in infrastructure, labor markets and government regulatory efforts

Infrastructure

SituationThe rapid increase in economic activity raises the number of workers, transients, support and logistical needs for communities within the field and the supply chain locations.

ComplicationsMany communities are small and not able to deal with the sheer number of people; basic services become strained to the breaking point. The pace of “normal wear and tear” increases exponentially.

Example impacts• Road paving falls behind• Temporary housing cannot be

built fast enough• Insufficient restaurants/stores.• Schools/hospitals overloaded

and understaffed

Labor

SkillsShale fields require all relevant petroleum and services skills, as well as support for all logistical and administrative activities. Even with complete labor participation, “rotator” workers have been required in almost all US shale fields.

EducationSchools and universities will need to rapidly focus on vocational training for drivers, industrial fields and waste management, as well as normal engineering and management skill sets.

Example impacts (US$)• A truck driver in the Bakken can

make $100k−$150k per year (the same as an experienced engineer or MBA in other places)

• Retailers and fast food chain in Williston offering signing bonuses (~$10k) to attract entry-level staff

Regulation

LandscapeImpacts from shale permeate to air, water, land and basic infrastructure. These areas fall under different laws and areas of influence.

ComplicationsMany provinces and localities will assert the needs of citizens through (sometimes) ill-informed local decision- makers. Though these people are not the mineral owners or investors, they have the ability to stop work through other choke points (local labor unions, community organizations).

Example impacts• Several towns and counties in

the state of New York banned fracturing altogether.

• Labor unions in several states negotiate directly with E&P companies to put pressure on service companies and suppliers.

Page 5

300 quantitative assumptions based on field planning and well pad design

EY’s proprietary work developing impact models has been used to support analysis for clients and governments

Governments/regulators

► Anticipated needs for capital► Revenue projections and assumptions► Inferred tax benefits► Required infrastructure investments

Operators

► Projected investment by function► Supplier qualification needs► Projections of service volumes► Direct and indirect labor needs

Oilfield services companies

► Projected market size by service► Manufacturing planning needs► Logistical spend estimates► Head count projections

Suppliers/support infrastructure

► Material requirements by commodity► Logistics assets and usage► Investment requirements to meet capacity► Market size estimates

Inputs/assumptions

EY ShaleDemand Model

EY ShaleLabor Impact

Model

Well/pad/HV assumptions Labor rates/

price indices

Standard material

inputs to pad and laterals

Logistics and infrastructure

needs

Key assumptions (preliminary)► Shale extraction would move quickly toward “pad development” with groups of horizontal wells

in a single site going in different directions (five or eight well groups) with single test well per pad.

► Real exchange rates with Argentine pesos and world currencies remain stable.► There are sufficient supplies and labor to meet growth projections.► Well designs are simple multistage plug and perforation slickwater fractures.► Multilateral completion techniques are not used.► Average hydraulic fracturing pace is 3-4 stages per day, and laterals average 20 stages.► Material inputs and services are relatively comparable to mixed shale fields in the US.► 75% of wells drilled in country are horizontal with single lateral (considered in model).

Possible outputs

Possible impact on Argentina

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The potential impact on Argentina’s people and communities over the next decade is extreme

2016

2017

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2019

2020

2021

2022

2023

2024

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2026

2027

0

200

400

600

800

1,000

1,200

1,400

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Conservative Aggressive

# wells drilled and completedper year

Hypothetical shale wells in country

$11.1b per year to operate frac spreads (equipment, people, materials inclusive)$8.4b per year in drilling and completion (other than fracturing)$2.4b per year in waste disposal$98m per year in core sampling & analysis$87m per year in site security

Services (Selected from 130 areas)

149 FTE (full time equivalents) per pad

21,607 FTE Direct labor at peak (2020)139,769 FTE Wider supply chain impact67,521 FTE Induced by employee activityTotal 228,357 FTEs at peak (2020)

For aggressive / eight well pad scenario

Labor

$1.7b per year in steel$1.1b per year in proppant$0.4b per year in chemicals$0.9b per year in cement

Materials

$0.7b investments in storage and transportation annually (at peak) for all assets, drivers, and trips to support pads (aggressive scenario)

Storage and Transportation

Total 228,357 FTEs at peak (2020)~40% growth in required labor force in region or rotating/traveling

(Introduced into region with 632k people in labor force (Neuquén Province, La Pampa Province, Malargue Dept. (Mendoza), Cities of General Rosa, Cipolletti (Rio Negro); with 61% labor force participation, 2010 population estimates)

Infrastructure/population

Sources: EY proprietary analysis and Shale Impact Model, preliminary assumptions (non-validated) based on published reports of E&P operators, investors, news services and government statements. World Bank labor force estimates and GDP estimate (2013), Wikipedia based on 2010 Argentine Census.

Assume steady investment pace after ramp-up

PRELIMINARY

6,990 wells in 10 years

17,481 wells in 10 years

All $ amounts are in USD at 2020 peak for aggressive case

$23.5b per year total investments at peak (2020) for capital investment in full supply chain (~4% of Argentinian GDP assuming $611b Annual GDP)

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Players must take a collaborative, integrated approach to manage the impact of this transition and the complexity of operations

E&P operators/JV partners

Government | Communities | Universities

Oilfield serviceprovidersSuppliers Midstream Refiners/

exporters

Legend: Operator owned

First-level vendor/contractor/partner/customer operated

Second-level vendor/contractor/partner/customer operated

Intra-field operations & logistics

Well Pad E

Well Pad D

Well Pad B

Well Pad C

Well Pad A

OEMs / distributors

Operator RDC

OFS provider warehouse

Supporting network providing material, equipment and services

Supporting midstream value chain network

OEMs/ distributors

Production Collection terminals

Pipeline networks

Processing plants

Well Pad F

Site Prep / construction contractor

Construction Equipment Moves

Rig move

Water supply and disposal wells

Sand / proppant staging yard

Specialty chemicals

On-site production storage

Cement provider

Pipe/ tubing supply yard

MRO flow

Sand / proppant supply source

Pipe/tubing manufacturer/ distributor

Rig move

Expedited/rushed/ hotshot runsRailRoadPipeline

ILLUSTRATIVE EXAMPLE

Well Pad G

Drilling contractor

On-site MRO storage

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Government regulators must have a consistent approach across provinces to confirm that private companies act in the best interests of the community

Operational reality for E&P operators

Framework for regulatory accountability

Federal regulationProvincial regulationLocal/department regulation

Local control areas Defined provincial direct control areas

Defined federaldirect influence areas

Water table

Waste/landfill

Population impact

Transport

Supplier plants

River basins

Inter-regional waterways

Strategic natural resources(coal, steel, fuel)

Trade / customs

Loca

l im

pact

International im

pact

Oceans

Impact spectrum

Mutually exclusive, collectively exhaustive = Effective regulation must have no gaps or overlaps and must provide consistency for investors and E&P operators

Cooperative service

agreement

Cooperative service

framework

Unions

Page 10

EY Advisory works with governments, E&P operators, Oilfield service companies and suppliers to optimize unconventional performance

Thought leadership

Global O&G network

9,600 EY O&G professionals worldwide

For more information, please reach out to:

Alex Fleming – alex.fleming@ey.comFabian Gomez – fabian.gomez@ar.ey.comEnrique Grotz – enrique.grotz@ar.ey.comJim Perrine – jim.perrine@ey.comJim Franks – james.franks@ey.com

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