'Shale Gas: Time to Invest, or Bubble About to Burst?' by Peter O'Malley, Canaccord at Mines and...

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PRIVATE & CONFIDENTIAL

Shale Gas:

The Unconventional Gas Revolution March 2013

What is shale gas?

Shale

� LaminatedLaminatedLaminatedLaminated, indurated consolidated source rock , indurated consolidated source rock , indurated consolidated source rock , indurated consolidated source rock

� ~50% of all sedimentary rocks are shale

� Some shale contains organic material (kerogen) – source of natural gas

� High permeability, low porosity

Source: American Geological Institute, Science Media Centre of Canada

Shale gas

� Methane Methane Methane Methane is the largest constituent of shale gasis the largest constituent of shale gasis the largest constituent of shale gasis the largest constituent of shale gas

� Thermogenic formation, but shallow shale gas contains biogenic material

Shale gas reservoirs and extraction

� Shale gas is trapped in rock formations and carbon-rich organic

matter

� Hydraulic fracturing is used to release and collect the trapped gasHydraulic fracturing is used to release and collect the trapped gasHydraulic fracturing is used to release and collect the trapped gasHydraulic fracturing is used to release and collect the trapped gas

� Shale reservoirs are generally hundreds to thousands of feet below

aquifers

Unlocking shale potential

Source: Forbes

Stage 1: horizontal drilling

� Horizontal drilling allows pipe setting for a mile or more horizontally through Horizontal drilling allows pipe setting for a mile or more horizontally through Horizontal drilling allows pipe setting for a mile or more horizontally through Horizontal drilling allows pipe setting for a mile or more horizontally through

the same rock formation the same rock formation the same rock formation the same rock formation >>>>10101010,,,,000 000 000 000 feet feet feet feet undergroundundergroundundergroundunderground

� Single Single Single Single horizontal well replaces the need to drill a dozen or more vertical wells, horizontal well replaces the need to drill a dozen or more vertical wells, horizontal well replaces the need to drill a dozen or more vertical wells, horizontal well replaces the need to drill a dozen or more vertical wells,

which reduces emissions, which reduces emissions, which reduces emissions, which reduces emissions, water water water water usage and disposal needsusage and disposal needsusage and disposal needsusage and disposal needs

Stage 2: perfing and fraccing

� Perfing: an electrical current sent down via the perforating gun to set off a

charge that shoots small holes through the casing and cement

� FraccingFraccingFraccingFraccing: concentrated hydraulic assaults that create long cracks, allowing : concentrated hydraulic assaults that create long cracks, allowing : concentrated hydraulic assaults that create long cracks, allowing : concentrated hydraulic assaults that create long cracks, allowing

more gas to flow more gas to flow more gas to flow more gas to flow into into into into the pipethe pipethe pipethe pipe

� Fraccing is completed multiple times to cover the horizontal distance of the

wellbore

Shale gas resources around the world

Source: EIA

Region Resource (tcf)

1 North America 1,389

2222 ChinaChinaChinaChina 1,2751,2751,2751,275

3 Latin America 1,225

4 Africa 1,042

5 Europe 639

6 Australia 396

Shale gas in North America (cont’d)

� Recoverable shale gas resource in North America is 1,389 tcf ; 862 tcf in the U.S. (compared to Qatar’s shale gas reserve

of 899 tcf)

� U.S. natural gas consumption accounts for 20% of the global total, at 22 tcf /year

� U.S. shale gas production accounted for ~2% of total natural gas production in 2000, but will reach 49% by 2035

� Current shale gas production volume is 22bcf/day, coming from main production areas such as Haynesville, Barnett,

Fayetteville, and Marcellus

US domestic gas production

25

20

15

10

5

0

1990 1995 2000 2005 2010

tcf/year

Conventional Tight Gas CBM Shale Gas

Source: Wood Mackenzie, EIA

Mowry Gammon BakkenExcello/

MulkyNew Albany

86-160tcf

Antrim

35-76tcf

Horton Bluff

Utica

Marcellus

Huron

Chattanooga

Floyd and

Conasauga/Neal

Fayetteville

Caney and Woodford

Haynesville/

Bossier

Woodford

Pearsall

Barnett

25-252tcf

Barnett

and Woodford

Palo

Duro

Pierre

Hovenweep

Lewis and Manos

97tcf

Cane

Creek

McClure

Monterey

Mancos

BaxterGreenRiver

Niobrara

Exploration Appraisal Development Production

Conventional vs. unconventional lifecycle

� Wells Wells Wells Wells experience significant declines in productivity over time. experience significant declines in productivity over time. experience significant declines in productivity over time. experience significant declines in productivity over time. Wells typically found in the Marcellus Shale experience a

production decline rate of ~65-86% within the first 12 months with subsequent declines in production throughout the

remaining life of the well

− Low permeability Low permeability Low permeability Low permeability characteristics of shale deposits

− Low concentration Low concentration Low concentration Low concentration of gas, spread over large areas

� Decrease in production each year leads to reduction to reduction to reduction to reduction in annual revenue in annual revenue in annual revenue in annual revenue from the wells

− Producers often enter into contracts with a set production quantity contracts with a set production quantity contracts with a set production quantity contracts with a set production quantity for a set amount of time, which worsens the situation

− As productivity of wells decline, producers need to need to need to need to bring new wells online bring new wells online bring new wells online bring new wells online

− Another option is to increase productivity via well stimulation increase productivity via well stimulation increase productivity via well stimulation increase productivity via well stimulation (i.e. more hydraulic fracturing, but costly)

Conventional asset lifecycle

Unconventional asset lifecycle

Concept Pilot Ramp-up Manufacture Exploit

Source: Wood Mackenzie, CNBC

25

15

10

5

0

0 5 10 15 20

mmcfd

Year

Gas production curve

Average cost per wellAverage cost per wellAverage cost per wellAverage cost per well

High: US$12mn

Low: US$2.5mn

Medium: US$7.25mn

Economic opportunities

Range of breakeven prices for probable new developments by resource theme

Source: Wood Mackenzie

• Low development Low development Low development Low development cost cost cost cost turns positive cash flow early

• Low cost/profitability comes down to stimulation and manufacturingstimulation and manufacturingstimulation and manufacturingstimulation and manufacturing

− Development cost: ~US$5-10mn per well in the U.S.; breakeven cost: US$1.85-4.50/mcfe

− Tight oil example: fixed costs at Bakken fell from US$35 in 2006 to about US$11 in mid-2009

− Short time frame from acquiring a development to production, quick cash recovery

0 10 20 30 40 50 60 70 80 90 100 110

Oil Sands - Integrated

Oil Sands - Mining

Oil Sands SAGD

Ultra-Deepwater

Offshore

NA tight Oil

Onshore - conventional

US$ / bbl (Brent)US$ / bbl (Brent)US$ / bbl (Brent)US$ / bbl (Brent)

Shale gas in China – will it become the next shale leader?

� China has the world’s largest shale gas resources with most of it untapped. China has the world’s largest shale gas resources with most of it untapped. China has the world’s largest shale gas resources with most of it untapped. China has the world’s largest shale gas resources with most of it untapped. Shale gas accounts for 66% of total resources

� Despite China’s slowing economy, Chinese gas demand is expected to grow by 40% over the next two years

� Domestic Domestic Domestic Domestic gas prices currently range from US$4/gas prices currently range from US$4/gas prices currently range from US$4/gas prices currently range from US$4/mcfmcfmcfmcf to US$6/to US$6/to US$6/to US$6/mcfmcfmcfmcf and PetroChina is leading further reforms to bring them

closer to international prices

Source: Bernstein research, Wood Mackenzie

Key focus regions for shale development

� Upper Yangtze and Yunnan,

Guizhou, Guangxi

� Tibet & Qinghai

� North West

� Mid/Lower Yangtze and South East

� North and North East

Right age

Right shale

Right age

Wrong shale?

Wrong age

Wrong shale?

1

2

3

4

5Shale gasShale gasShale gasShale gas842 842 842 842 tcftcftcftcf

66%66%66%66%

Conventional Conventional Conventional Conventional 230 230 230 230 tcftcftcftcf

18%18%18%18%

CBMCBMCBMCBM204 204 204 204 tcftcftcftcf

16161616%%%%

China’s

total gas

resources

� The long awaited 12121212thththth Five Year Plan Five Year Plan Five Year Plan Five Year Plan highlighted the

growing importance of shale to China

� Ambitious 2020 target Ambitious 2020 target Ambitious 2020 target Ambitious 2020 target of 6-10bcf/d (delivering over the

next 10 years what the U.S. did over the last 10 years), but but but but

limited vision on how to do itlimited vision on how to do itlimited vision on how to do itlimited vision on how to do it

� Of the 3 oil majors, PetroChinaPetroChinaPetroChinaPetroChina is the most leveraged is the most leveraged is the most leveraged is the most leveraged –

already holds the acreage and controls infrastructure

where shale gas is located

� More levered exposure to shale gas likely to come from

smaller service names such as rig manufactures and

specialist small cap service companies

China’s current progress

China saving for the future? Challenges and issues

0 0 1 2 3 6.511

18

29

48

80

2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

China is targeting 60-100bcm of shale gas

production/year by 2020 (bcm)

� 65% CAGR from 2015-2020

Source: Bernstein research

Company Blocks Province

Wells

drilled

Success

wells Others

PetroChina

Weiyuan Sichuan 11 4

Changning Sichuan

Zhaotong Yunnan

Fushun-

YongchuanSichuan

Sinopec

Jiannan Sichuan

Huangping Guizhou 5 2

Nanchuan Sichuan

CNOOC AnhuiEarly

exploration

Yanchang Yan’an Shaanxi 3

Non-

marine

shales

CUCBM

Shouyang Shanxi

Qinyuan Shanxi

Jincheng Shanxi

Shale gas in Australia – a commercial reality?

Shale gas in Australia

� Australian shale gas resources: 396 tcf

� IIIInnnn OOOOccccttttoooobbbbeeeerrrr 2222000011112222,,,, SSSSaaaannnnttttoooossss aaaannnnnnnnoooouuuunnnncccceeeedddd tttthhhheeee ffffiiiirrrrsssstttt sssshhhhaaaalllleeee ggggaaaassss

productionproductionproductionproduction from Australia’s Cooper Basin

� Too early to declare true commercialityToo early to declare true commercialityToo early to declare true commercialityToo early to declare true commerciality, but a milestone

for shale prospects

� IIIInnnniiiittttiiiiaaaallll pppprrrroooodddduuuuccccttttiiiioooonnnn tttteeeessssttttssss ffffrrrroooommmm tttthhhheeee ffffiiiirrrrsssstttt ffffeeeewwww wwwweeeellllllllssss eeeexxxxcccceeeeeeeeddddeeeedddd

expectationsexpectationsexpectationsexpectations and are comparable with plays in the U.S.

� >US$1.5 >US$1.5 >US$1.5 >US$1.5 bnbnbnbn has now been committed has now been committed has now been committed has now been committed to shale or tight

gas exploration since 2010

� Much work to be done

− Shale breakeven Shale breakeven Shale breakeven Shale breakeven costs for early wells costs for early wells costs for early wells costs for early wells are are are are

US$15.5/mcfUS$15.5/mcfUS$15.5/mcfUS$15.5/mcf----US$18.5/US$18.5/US$18.5/US$18.5/mcfmcfmcfmcf, far higher than , far higher than , far higher than , far higher than

prevailing gas price prevailing gas price prevailing gas price prevailing gas price

− Cost of extraction needs to be reduced considerably

to turn Australia's shale resource into a commercial

reality (i.e. Fairview coal seam)

0 1000

km


The geopolitical environment of shale gas

USA

Europe

China

Australia

Japan

Malaysia

QatarSabine Pass

India

South America

Africa

Canada

Source: EIA

Issues U.S. China Proposal from 12th FYP

Industry Industry Industry Industry

structurestructurestructurestructure

• CompetitionCompetitionCompetitionCompetition between E&P’s and

integrated oil companies for for for for

acreageacreageacreageacreage

• Unrestrained accessUnrestrained accessUnrestrained accessUnrestrained access for foreign

O&G companies to participate

• PetroChinaPetroChinaPetroChinaPetroChina and Sinopec dominate and Sinopec dominate and Sinopec dominate and Sinopec dominate

onshore O&G resources

• Restricted foreign participation Restricted foreign participation Restricted foreign participation Restricted foreign participation and

limited competition from smaller

companies

• Encourage qualified companies to

participate, but blocks will be taken

back if no satisfactory progress

• Signed joint studies agreement with

Shell, Statoil, Conoco, BP, Chevron, etc.

InfrastructureInfrastructureInfrastructureInfrastructure • 600,000km of open access open access open access open access

pipelinepipelinepipelinepipeline

• Many conventional wells, widely

distributed tie-in points minimizing minimizing minimizing minimizing

new infrastructure spendingnew infrastructure spendingnew infrastructure spendingnew infrastructure spending

• Gas infrastructure is generally lacking Gas infrastructure is generally lacking Gas infrastructure is generally lacking Gas infrastructure is generally lacking

• No open access system No open access system No open access system No open access system with most

capacity controlled by PetroChina

• Transmit shale gas in existing natural

gas pipelines; construct pipeline

networks

• Utilize small scale CNG, LNG technology

to allow for local utilization

LicensingLicensingLicensingLicensing • Transparent licensing Transparent licensing Transparent licensing Transparent licensing

arrangements arrangements arrangements arrangements which allows

competitive bidding for shale gas

assets

• No mineral definition for shale gas

which prohibits legal development of

shale gas resources

• License round procedures are adLicense round procedures are adLicense round procedures are adLicense round procedures are ad----hochochochoc

• Establish criteria for entry into shale gas

• Development and raise minimum

investment required

Fiscal Fiscal Fiscal Fiscal • Clear, established fiscal structureClear, established fiscal structureClear, established fiscal structureClear, established fiscal structure • Cumbersome PSC contracts for Cumbersome PSC contracts for Cumbersome PSC contracts for Cumbersome PSC contracts for

foreign investorsforeign investorsforeign investorsforeign investors

• No subsidy or clarity on pricingNo subsidy or clarity on pricingNo subsidy or clarity on pricingNo subsidy or clarity on pricing

• Introduce subsidies, establish clear,

transparent fiscal structure

InvestmentInvestmentInvestmentInvestment • Total capex investment of

>US$1.9tn over next 25 years

• Current Current Current Current capexcapexcapexcapex of US$33bn of US$33bn of US$33bn of US$33bn (which

equals total China upstream

expenditure)

• Sinopec plans to spend US$100mn Sinopec plans to spend US$100mn Sinopec plans to spend US$100mn Sinopec plans to spend US$100mn

over 3 years over 3 years over 3 years over 3 years on unconventional O&G

• Doesn’t come close to required capex

for large scale development even if

together with PetroChina

• Enact incentives to encourage

investments and to increase spending

on shale gas resources survey and

evaluation

TopographyTopographyTopographyTopography • Largely flat and rolling plains Largely flat and rolling plains Largely flat and rolling plains Largely flat and rolling plains

which allows drilling and

movement of equipment/vehicles

• Many shale basins are located in

mountainous regionsmountainous regionsmountainous regionsmountainous regions

• n/a

Why the U.S. vs… say China?


Why the U.S. vs… say China?


Issues U.S. China Proposal from 12th FYP

WaterWaterWaterWater • Per capital renewable water renewable water renewable water renewable water

resources 17,000mresources 17,000mresources 17,000mresources 17,000m3333 per yearper yearper yearper year,

much higher than China

• Significant issue in Significant issue in Significant issue in Significant issue in TarimTarimTarimTarim basinbasinbasinbasin

• Sichuan’s per capita water resource is per capita water resource is per capita water resource is per capita water resource is

lower than the USlower than the USlower than the USlower than the US

• Recycled use of fraccing fluid to reduce

water usage

Land usageLand usageLand usageLand usage • NonNonNonNon----intensive farming intensive farming intensive farming intensive farming and well

established rules of access

• Sichuan is highly populated highly populated highly populated highly populated • Give priority to approving land use for

shale gas development

Service Service Service Service

industryindustryindustryindustry

• Highly developed and Highly developed and Highly developed and Highly developed and

sophisticated sophisticated sophisticated sophisticated which can support

large scale development drilling

• Will require land rigs Will require land rigs Will require land rigs Will require land rigs with capability for

extended reach drilling plus fraccing extended reach drilling plus fraccing extended reach drilling plus fraccing extended reach drilling plus fraccing

and pumping auxiliary servicesand pumping auxiliary servicesand pumping auxiliary servicesand pumping auxiliary services

• Develop specialized domestic oil services

and technology companies

TechnologyTechnologyTechnologyTechnology • AdvancedAdvancedAdvancedAdvanced in drilling rigs, multi-

stage fraccing, propant fluids and

logging tools

• Chinese majors relatively

inexperienced inexperienced inexperienced inexperienced

• Foreign participation will be key Foreign participation will be key Foreign participation will be key Foreign participation will be key to

technology transfer

• Establish national research center of

shale gas

• Provide tariff exemption for importing of

shale gas equipment

ShaleShaleShaleShale depthdepthdepthdepth • ShallowShallowShallowShallow, paleozoic plays at 2-4km • Deeper in Sichuan Deeper in Sichuan Deeper in Sichuan Deeper in Sichuan (4-4.5km)

• Require deeper wells/more costly

• n/a

Inert gasesInert gasesInert gasesInert gases • Fewer issues with H2S and CO2 • Sichuan basin has high composition of

H2S (>1%)

• n/a

LiquidsLiquidsLiquidsLiquids

contentcontentcontentcontent

• Large number of liquid plays liquid plays liquid plays liquid plays such

as Eagle Ford, Barnett and Granite

Wash which significantly enhances enhances enhances enhances

economic value of gaseconomic value of gaseconomic value of gaseconomic value of gas

• Limited info on shale liquid Limited info on shale liquid Limited info on shale liquid Limited info on shale liquid content • n/a

Structural Structural Structural Structural

complexitycomplexitycomplexitycomplexity

• Low levels of structural Low levels of structural Low levels of structural Low levels of structural

deformation deformation deformation deformation and complexity

• More structurally deformed More structurally deformed More structurally deformed More structurally deformed which

adds to development complexity

• n/a

Why the U.S. vs…say China?

Source: EIA

Pipeline comparison

ChinaU.S.

� Fastest Fastest Fastest Fastest growing growing growing growing natural natural natural natural gas gas gas gas marketmarketmarketmarket

− Aggregate demand for natural gas in emerging or non-OECD

Asia is ~400 bcm

− Growth over the next decade is expected to be ~9%

� Limited growth in supplyLimited growth in supplyLimited growth in supplyLimited growth in supply

– Indonesia, Malaysia, India and ThailandIndonesia, Malaysia, India and ThailandIndonesia, Malaysia, India and ThailandIndonesia, Malaysia, India and Thailand are all experiencing

a slowslowslowslow----down in conventional gas productiondown in conventional gas productiondown in conventional gas productiondown in conventional gas production

– Resulting in shift from being a net exporter of natural gas to

being a net importer of gas

� If unconventional gas resources left untapped, Asia will need Asia will need Asia will need Asia will need

to dramatically increase importsto dramatically increase importsto dramatically increase importsto dramatically increase imports

� Estimated gas deficit of 300 bcm (30 bcf/d) by 2020

Non-OECD Asia demand and supply gap

Why Asia needs an unconventional gas resolution

0

100

200

300

400

500

600

700

800

900

1000

2000 2005 2010 2015 2020

bcm

bcm

bcm

bcm

Natural gas production Natural gas consumption

Non-OECD Asia gas demand

surpassed gas production

in 2011

Supply gap of over 300

bcm expected in 2010


-350

-300

-250

-200

-150

-100

-50

0

50

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202012 2013 2014 2015 2016 2017 2018 2019 2020

NonNonNonNon----OECD Asia exported gas for three decadesOECD Asia exported gas for three decadesOECD Asia exported gas for three decadesOECD Asia exported gas for three decades

Supply gap requires over 300 Supply gap requires over 300 Supply gap requires over 300 Supply gap requires over 300 bcmbcmbcmbcm net imports in 2020net imports in 2020net imports in 2020net imports in 2020

Market based gas pricing in Asia

Key requirement for unconventional gas to work

� Development of a market based gas pricing market based gas pricing market based gas pricing market based gas pricing system is one of system is one of system is one of system is one of

the most significant challenges the most significant challenges the most significant challenges the most significant challenges

− In the U.S., high gas prices in the last decade were a key

incentive to the development of unconventional gas supply

− In Asia, one of the key challenges is regulated domestic gas

pricing

� In most Asian countries, price of domestic gas is set by the In most Asian countries, price of domestic gas is set by the In most Asian countries, price of domestic gas is set by the In most Asian countries, price of domestic gas is set by the

governmentgovernmentgovernmentgovernment

− As a result, gas prices stayed at sufficiently low levels to

discourage the development of unconventional gas

− Easier to Easier to Easier to Easier to import expensive LNG than raise domestic gas import expensive LNG than raise domestic gas import expensive LNG than raise domestic gas import expensive LNG than raise domestic gas

prices and produce shale gas prices and produce shale gas prices and produce shale gas prices and produce shale gas

� Over the past 10 years, domestic gas prices in Asia increased

from around US$2/mscf to US$5/mscf

� Price Price Price Price reform reform reform reform policies are under policies are under policies are under policies are under proposalproposalproposalproposal in China, India, and

Indonesia, which should result in significant increase in gas

prices (from US$5/mscf to US$8-10/mscf)

� Even in Eastern Australia where gas prices are market driven, Even in Eastern Australia where gas prices are market driven, Even in Eastern Australia where gas prices are market driven, Even in Eastern Australia where gas prices are market driven,

prices have risen to US$7prices have risen to US$7prices have risen to US$7prices have risen to US$7----8/8/8/8/mscfmscfmscfmscf as markets start to tighten as markets start to tighten as markets start to tighten as markets start to tighten

head of the start up of LNG export projectshead of the start up of LNG export projectshead of the start up of LNG export projectshead of the start up of LNG export projects

Historical long-term gas price trend in Asia

Country

US$/mscf

old price

US$/mscf

new price Mechanism

China 3-4 8-10 FO & LPG

Australia 3-4 7-8 Gas on gas competition

Indonesia 3-4 8-9 Regulated

Thailand 5 6-8 Inflation, US PPI, FO

Japan 12 16-20 JCC linked

Korea 12 16-20 JCC linked

India 4 6-12 Regulated

Increasing gas prices encourage unconventional

gas solutions

6

4

3

2

1

0

US$/mscf

Range Average

1999 2001 2003 2005 2007 2009 2011

5


Unconventional resources are the key theme in global M&A


Note: Companies highlighted are Majors, International Large Caps and other notable players, at point of entry. Chort shows only acquisitions, and does not account for “grass roots” leasing. Excludes ExxonMobil/XTO and ConocoPhillips/Burlington deals

� Unconventional Unconventional Unconventional Unconventional resources represent US$131bn, or 33% resources represent US$131bn, or 33% resources represent US$131bn, or 33% resources represent US$131bn, or 33% of of of of total upstream global M&A spend total upstream global M&A spend total upstream global M&A spend total upstream global M&A spend in the in the in the in the past three past three past three past three yearsyearsyearsyears

� North America represents 34% of the total upstream global M&A spend in the past three years

� Acquisitive NOC’s/10C’s: Petronas, KNOC, PTTEP, Total, PetroChina, CNPC, CNOOC, Sinopec, Sinochem, KPC

� In 2012, Asian NOC’s spent US$47 In 2012, Asian NOC’s spent US$47 In 2012, Asian NOC’s spent US$47 In 2012, Asian NOC’s spent US$47 bnbnbnbn on M&A; Chinese NOCs were the largest spender on M&A; Chinese NOCs were the largest spender on M&A; Chinese NOCs were the largest spender on M&A; Chinese NOCs were the largest spender

− SinochemSinochemSinochemSinochem/Pioneer Natural Resources (horizontal /Pioneer Natural Resources (horizontal /Pioneer Natural Resources (horizontal /Pioneer Natural Resources (horizontal WolfcampWolfcampWolfcampWolfcamp shale), shale), shale), shale), US$1.7bnUS$1.7bnUS$1.7bnUS$1.7bn

− Sinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bnSinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bnSinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bnSinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bn

Cumulative acquisition spend, shale gas vs. tight oil focused deals

0

Cumulative acquisition spend (US$ million)

2004 2005 2006 2007 2008 2009 2010 2011 2012

20

40

60

80

100

120

NOC’s – overseas M&A climbing; North America a key target


Overseas M&A spend, by NOC origin Overseas M&A spend, by deal geography

North America accounts for ~50% of global M&A spend

Regional M&A 2012Global M&A


Outside of North America, M&A in 2012 has been relatively subdued


Chinese NOC’s – competitive buyers; demand drivers remain in place


Note: Overseas equity production PetroChina/CNPC, CNOOC, Sinochem and Sinopec (entitlement basis)

Chinese NOC’s vs. global average China oil supply/demand balance

Shale gas APAC M&A since 2010

Australia is accounted for >30% of the natural gas transactions in Asia,

which makes it the biggest M&A target in the region

Target country Deal countTransaction value

(US$m)

AustraliaAustraliaAustraliaAustralia 30303030 13,47413,47413,47413,474

Kazakhstan 17 9,185

Indonesia 13 2,617

China 10 1,766

India 4 16,103

Thailand 4 280

Caspian Sea 3 1,501

Malaysia 3 757

Vietnam 2 1,195

Singapore 2 224

New Zealand 2 84

Philippines 2 69

Papua new guinea 1 42

Pakistan 1 775

Hong Kong 1 77

Japan 1 73

Indonesia14%

Australia31%

China10%

Kazakhstan18%

New Zealand2%

Malaysia3%

Singapore2%

Caspian Sea3%

Papua New guinea

1%

Philippines2%

Thailand4% India

4%

Vietnam2%

Hong Kong1%

Japan1%

Pakistan1%

Source Capital IQ

Natural gas M&A in APAC (deal volume)

Australia is driving the M&A trend

� >US$1 >US$1 >US$1 >US$1 bnbnbnbn has been committed has been committed has been committed has been committed to shale or tight hydrocarbon exploration in 10 farm-in deals with Australia since mid-2010

� The leading Cooper Basin The leading Cooper Basin The leading Cooper Basin The leading Cooper Basin players (CBJVplayers (CBJVplayers (CBJVplayers (CBJV, Beach Energy and , Beach Energy and , Beach Energy and , Beach Energy and SenexSenexSenexSenex Energy) have Energy) have Energy) have Energy) have dedicated around US$500mn to dedicated around US$500mn to dedicated around US$500mn to dedicated around US$500mn to

exploration programs over the next exploration programs over the next exploration programs over the next exploration programs over the next two two two two yearsyearsyearsyears

� In contrast to CSG, where billions of dollars were spent on M&A, the majors and larger independents make far earlier entries to Australian shale plays

� Buyers avoid costly future acquisitions and give expertise and financial support to sellers with limited industry knowledge and small balance sheets

Key shale and/or tight gas farm-in deals since 2010

Buyer Seller Date State/territory Basin Primary target

Estimated spending

(US$m)

Statoil Petrofrontier Jun-12 NT Georgina Oil 230

Total Central Petroleum Nov-12 NT/QLD Georgina Gas 190

Santos Central Petroleum Oct-12 NT Amadeus Gas 150

HESS Falcon Oil and Gas May-11 NT Georgina Oil 140

BG Drillsearch Energy Jul-11 QLD Cooper Gas 130

ConcocoPhilips New Standard Energy Jul-11 WA Canning Gas 110

Mitsubishi Buru Energy Jun-10 WA Canning Gas 80

CNOOC Exoma Dec-10 QLD Galilee Oil 50

Beach Energy Territory Oil and Gas Oct-11 NT Bonaparte Oil 36

Senex Energy Planet Gas Aug-11 SA Cooper Gas 30

TotalTotalTotalTotal 1111,,,,111144446666


The future of shale gas

How the U.S. shale gas boom could impact emerging markets

� The unlocking of The unlocking of The unlocking of The unlocking of shale shale shale shale gas gas gas gas resources resources resources resources via hydraulic fraccing is spurring economic activity and aaaaddddddddiiiinnnngggg aaaa ccccoooommmmppppeeeettttiiiittttiiiivvvveeee eeeeddddggggeeee ttttoooo

the industry with less expensive gas and electricity pricesthe industry with less expensive gas and electricity pricesthe industry with less expensive gas and electricity pricesthe industry with less expensive gas and electricity prices

� With cheap energy, With cheap energy, With cheap energy, With cheap energy, U.S. U.S. U.S. U.S. manufacturing will pick up and move down the ladder to capturing the production of less manufacturing will pick up and move down the ladder to capturing the production of less manufacturing will pick up and move down the ladder to capturing the production of less manufacturing will pick up and move down the ladder to capturing the production of less

sophisticated goods sophisticated goods sophisticated goods sophisticated goods (i.e. computers, fabricated metals and automobiles) currently manufactured in emerging markets

− As a result, the U.S. U.S. U.S. U.S. will likely compete with emerging markets will likely compete with emerging markets will likely compete with emerging markets will likely compete with emerging markets for market share rather than being a consumer

− Increases the need of emerging markets to improve manufacturing sophistication/technology

BNSF Railway to test switch to natural gas

� BNSF RailwayBNSF RailwayBNSF RailwayBNSF Railway, the second biggest U.S. consumer of diesel fuel, plans plans plans plans to to to to test using natural gas to power test using natural gas to power test using natural gas to power test using natural gas to power its locomotivesits locomotivesits locomotivesits locomotives

� A gallon of diesel fuel costs US$3.97 diesel fuel costs US$3.97 diesel fuel costs US$3.97 diesel fuel costs US$3.97 in 2012 on average, where as the equivalent natural gas costs US$0.48natural gas costs US$0.48natural gas costs US$0.48natural gas costs US$0.48

− Weaken oil’s dominance as a transportation fuel in North America

− The surplus spurred by new technologies has sent natural-gas prices plummeting, which prompted industries from

electric utilities to tugboat operators to switch to gas

� Companies Companies Companies Companies and government agencies increasingly are looking at using gas and government agencies increasingly are looking at using gas and government agencies increasingly are looking at using gas and government agencies increasingly are looking at using gas to power fleet vehicles, such as garbage trucks

� Gas is also making inroads in marine vesselsGas is also making inroads in marine vesselsGas is also making inroads in marine vesselsGas is also making inroads in marine vessels

− Wartsila Oyj last year signed contracts to send China the world’s first tugboats operating on diesel-LNG engines

− Shell signed a MOU with Edison Chouest Offshore (ECO) to supply LNG fuel to marine vessels in the Gulf of Mexico

Ukraine reduces dependency on Russian gas imports

� Ukraine’s state company Nadra Yuzivska and Shell signed a US$10bn to extract Ukraine’s shale gas resources, sharing a

50-year production term

Source: CNBC

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