© 2015 IHS. ALL RIGHTS RESERVED. INTERNATIONAL SHALE PERSPECTIVE – PRESENT CHALLENGES & OUTLOOK IHS ENERGY Fernando Covas, Director +1 713 980 4446 [email protected].

© 2015 IHS. ALL RIGHTS RESERVED.

INTERNATIONAL SHALE PERSPECTIVE – PRESENT CHALLENGES & OUTLOOK

IHS ENERGY

Fernando Covas, Director+1 713 980 [email protected]

NCDEX Guar International 2015Jaipur, India18 November 2015

mailto:[email protected]

2

Contents


NCDEX Guar International: International Shale Perspective / November 2015

INTRODUCTION

EXECUTIVE SUMMARY

MACROECONOMIC ENVIRONMENT

OILFIELD ACTIVITY TRENDS

GUAR CONSUMPTION TRENDS

QUESTIONS & ANSWERS

© 2015 IHS. ALL RIGHTS RESERVED. 3


Introduction



IHS is uniquely positioned to assist in clients given our extensive experience across the oilfield

• Provide strategy consulting and advisory services primarily to energy clients

• Strength in the oilfield supply market

• Often work with E&Ps or suppliers across range of industries that supply products/services to it

• Generally work at C-Level or business lead level

• Industry-leading, granular analysis of the oilfield with unique-in-market application of strategy consulting capabilities to turn research into actionable intelligence

• Deep unconventional market knowledge and expertise

• Employ both primary information collection + secondary research

Strategy Consulting

Market Intelligence

Oil & Gas - Conventional

Oil & Gas - Unconventional

Consumables

Equipment Production

Drilling & Completions

PacWest Capabilities Consulting & Advisory

Market Intelligence Products



Our upstream experience spans the oilfield; we have differentiated expertise in a number of key areas

5

Oilfield Services, Equipment & Materials ExpertiseProductionCompletionDrilling

Water Management

• Contract drilling• Drilling support• Drilling fluids• OCTG• Rig move• Solids control• Directional drilling services• Drill bits

• Hydraulic fracturing• Completion hardware• Completion chemicals• Proppant• Frac rentals• Coil tubing• Wireline

• Workover rigs• Fishing & rental services• Production chemicals• Power solutions• Surface equipment• Subsea production

equipment/services• Offshore service vessels

Oilfield Equipment

• Flowback services • Water treatment• Logistics services (e.g.,

hauling, transfer)

• Drilling equipment • Rotating equipment• Completions equipment

Exploration

• Seismic acquisition services

• Data analysis• Seismic vessels

• Seismic equipment

• Water sourcing/disposal

Non-exclusive sampling of the areas of work that we have undertaken



We work with many leading upstream oil/gas players in the unconventional space

E&P EquipmentOFS Financial



Our products and services provide unrivalled breadth and depth in support of strategic decision-making

• Cost Performance

• Upstream Costs & Expenditures

• Engineering & Fabrication

• Rig Markets

• Offshore Operations

• Offshore Services & Vessels

• Subsea & Capital Equipment

• Onshore Operations

• Onshore Services & Materials

• OFS & Financial Services

• Strategy

• New market entry

• Competitive analysis

• Technology management

• Acquisition & divestiture support

• Portfolio strategy

• Exploration & Production

• Upstream Costs & Expenditures

• Engineering & Fabrication

• Rig Markets

Market Intelligence Consulting Capabilities



We have the market-leading suite of products covering the frac market

Detailed analysis and forecast of global frac services market, including regional breakdown of supply, demand, utilization, pricing, as well as market, and technology trends and analysis of stacked vs. active horsepower

Monitors and forecasts frac demand, supply, utilization, trends, drivers, and constraints across key Chinese frac markets

Stripped-down version of PumpingIQ: regional frac fleet/capacity counts, by pumper, and other key data points from PumpingIQ

Play-by-play details of NAM rig counts, well completions, wells frac’ed, frac stages, and stimulated length with a rolling three year forecast

Analysis of US oilfield water management market, including regional supply, demand, pricing, trends for sourcing, logistics, drill/frac, flowback, treatment, disposal service including competitive landscape

Analysis/forecast of US proppant supply, demand, and pricing, by play and proppant type (sand, resin-coated sand, ceramics); including regional pricing indices, logistics and transloading analysis and a marginal cost curve buildup

In-depth analysis of stimulation chemicals market and trends, including a market overview report and deep-dive reports on 8 key chemical categories (e.g. crosslinker, HCl, guar, etc.)

Frac database including location, operator, pumper, chemicals, suppliers, and more, for over 100,000 wells in North America

Product Description



Executive Summary



A convergence of macroeconomic factors have stifled hydraulic fracturing activity and guar consumption• An oversupply of oil, which coincided with a global slowdown in

demand, led to a rapid fall in commodity prices at the end of 2014

• E&Ps were quick to reduce their capital plans during this downturn, thus affecting demand and pricing for equipment and services across the Oil & Gas value chain, including guar

• Key players are unlikely to return to 2014 levels of spend because of short-term spikes in oil prices, as they work with forecasts similar to that of IHS

• IHS forecasts a prolonged period of oversupply and a weakening global economy to continue exerting downward pressure on commodity prices

• Oilfield activity, and thus, demand for guar is expected to recover slowly through 2017



Macroeconomic Environment



A fundamental industry re-structuring is underway

• The industry “reset” began in late 2014 and will continue well into 2016 for both E&P and service companies as they adjust to a 50% decline in oil prices

• In addition to significant organizational downsizing, projects are being re-designed and financial structures being re-thought

• Lower costs for steel, drilling, and other services are necessary, but not sufficient to provide adequate returns in a $60 world. In a $45-$50 world, the need intensifies

• Different fiscal structures, above-ground risk, and company portfolio choices will drive the pace at which projects move forward

• Companies are struggling with how to perform in a downturn but position for the upturn



Supply growing faster than demand set the stage for the oil price crash and is still pressuring markets in 2015

• Strong supply growth in 2014 and 2015 crashed oil prices

• Non-OPEC is mainly US unconventionals, which alone grew twice as fast as global 2014 demand

• OPEC countries also increased supply in 2015: Saudi Arabia and Iraq

• Markets begin to tighten in 2016

• Non-OPEC declines in response to very low prices

• OPEC increases as Iranian barrels begin to come back

2010 2011 2012 2013 2014 2015 2016 2017-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

OPEC Supply Non-OPEC Supply

Liquids demand vs. supply annual growth

Notes: Liquids supply includes crude oil, condensate, and natural gas liquids (NGLs). Liq-uids demand includes all refined products, blended biofuels, synthetic fuels, as well as liquefied petroleum gases (LPGs) and ethane. Source: IHS © 2015 IHS

MM

b/d

Demand

SupplyOver-supply



In a $45/barrel WTI world, US liquids production falls to 8.6 million barrels/day by 2Q16

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Jul-1

8

Jan-

19

Jul-1

9

Jan-

20

Jul-2

00

1,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,0009,000,000

10,000,00011,000,000

Eagle Ford Bakken Bone Spring Wolfcamp - Midland Wolfcamp Delaware SpraberryPermian - Other Wattenberg Niobrara Frac Play Anadarko Penn Anadarko Wash BarnettCalifornia Heavy Oil Cotton Valley Marcellus PA Marcellus WV Mississippian Lime SCOOPUtica Woodford Ardmore Woodford Cana DUC Fluid Type - Dry Gas Fluid Type - Wet Gas

Bar

rels

/day

9.6 8.6

Eagle Ford

Bakken

Permian Basin

GOM deepwaterAlaska

USL-48

onshore

US total liquids production by quarter

DUCs

Source: IHS; 10 October 2015 © 2015 IHS



Excess supply expected to keep prices low through mid-2016 as the US, and other, production adjusts

• Oversupply is expected to continue for the next 12 months, before narrowing in the second half of 2016 and helping markets tighten

• High volatility caused by financial markets and US supply response

• Downside risks of quicker US rebound as prices rise

• Timing and pace of Iran’s return also adds uncertainty

• 2015: $53 Brent/$48 WTI

• 2016: $55 Brent/$50 WTI

• 2017: $63 Brent/$58 WTI

2014 2015 2016 2017 2018 2019 2020 -

20

40

60

80

100

120

WTI Brent

Oil prices (Nominal $/bbl)

Source: IHS © 2015 IHS



A weakening global economy will sustain the surplus of energy commodities through 2015 and much of 2016• Prices for oil, gas, and coal will remain depressed and producers under

pressure to cut production and reduce capital investment

• The scale of energy demand growth that has been curtailed by a maturing and structurally evolving Chinese economy is not likely to be offset by any single country or group of countries over the short to medium term

• Growing stockpiles of energy supplies mean that price rebounds will likely not be sharp but steady and gradual (barring severe shocks to supply from geopolitical or weather events)

• Surplus supply capacity is forcing energy producers across the value chain to become more efficient in their operations and capital expenditures, which will likely drive down production costs and possibly keep prices lower for a longer period than many expect

• Lower energy prices will benefit large energy-consuming industries and should provide some marginal benefit to individual consumers globally in terms of greater spending power, thus helping to fuel eventual economic recovery




Exploration cost index is the most sensitive to oil price while operating cost index is the least sensitive

• Development costs include hydraulic fracturing costs

• Exploration costs respond the fastest to changes in crude price, followed by drilling and development cost indices, while operations cost index is the least correlated with crude price

• For the forecast, however, due to the concern of oversupply, we expect exploration cost index to recover much slower than the previous rebound following crude price increase

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

70

90

110

130

150

170

190

210

230

-

20

40

60

80

100

120

Exploration Onshore Drilling Onshore Development OnshoreOperations Onshore Brent Price ($/bbl)

Onshore cost index by development cycle


Co

st I

nd

ex

Bre

nt

Pri

ce (

$/b

bl)

BrentYoY∆ -45%

Dev’t YoY∆ -8%



Oilfield Activity Trends



2015 is forecast to close with a record slowdown of activity; Modest improvement not expected until 2017• After declining through 15Q3, D&C activity in North America expected to increase in 15Q4

• Despite some recovery in oil prices in 15H1, rig count is less than half the level of 14Q4

• We expect a 37% fall in frac demand in 2015

• US Land utilization expected to hit 44% in 15Q3, the lowest point since PumpingIQ began publication

• Falling demand expected to drive average capacity utilization to 50% in 2015 and to 53% in 2016 in the US (56% in Canada)

• Low utilization forcing pumpers to stack a high of 7.9MM HHP in 15Q3, making re-activation more challenging

• Frac pricing expected to fall by 37% in 2015; most concessions made in 1H15 but small price drops ongoing

• Most pricing has been taken out of the market already; further price falls largely incremental with some pumpers pursuing unsustainable practices (bidding well below cost)

• Pumpers and vendors have worked together to manage costs down across the supply chain; little room to continue cuts

• We do not expect a significant increase in frac pricing until early 2017 (assumes an incremental D&C recovery)



Prolonged low oil prices expected to drive a trough in demand during 15Q3, down 47% from period high in 14Q4

• US D&C activity is on a sharp decline due to low oil prices

• Substantial reductions in E&P capital budgets (-40%) is the key driver

• Frac stages expected to fall by 36% in 2015, compared to a 45% fall in rig count

• Frac demand in 2015 in the US Land market expected to fall 37% YoY due to falling D&C activity

• Frac demand in 15Q3, which represents the trough, is expected to be ~47% lower than peak frac demand in 14Q4

14Q1

14Q3

15Q1

15Q3

16Q1

16Q3

17Q1

17Q3

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

7,000,000

9,000,000

11,000,000

13,000,000

15,000,000

17,000,000

19,000,000

Total Stages HZ Stages Frac Demand

US frac stages & frac demand


Sta

ge

Co

un

t ('0

00)

Ho

rsep

ow

er (

MM

HH

P)



As E&Ps have shifted activity to more profitable acreage, breakeven costs have decreased

• This analysis only includes wells that we expect to be drilled and completed in 2015

• Activity has shifted toward the most economic areas of plays

• Breakeven costs have continued to improve as D&C costs continue to fall

Utica Shale

Eagle Ford Shale

Wattenberg

Bakken Shale

Delaware

Bone Spring

Wolfcamp

Cana Woodford

California Heavy Oil

Mississippian

Arkoma Woodford

Anadarko Pennsylvanian

$- $20 $40 $60 $80 $100 $120

Breakeven prices for oil/liquids plays (in $/bbl)




NAM will account for 71% of global frac capacity by 15Q4, but its share forecast to decrease to 65% by 2019

• We downgraded our projections of global frac capacity growth largely due to slower than anticipated growth in China

• NAM’s share of global capacity (75% in 2013) expected to decrease to 65% by 19Q4, as international supply grows

• Global frac capacity expected to expand by 6 MM HHP (+22%) between 2014 and 19Q4, with markets outside NAM accounting for 71% of that growth

• China growth has picked up after a slow period, with that country itself accounting for 25% of global frac capacity growth to 2019 since 2014

2013 2014 2015 2016 2017 2018 20190

5

10

15

20

25

30

35

40

2527 28

2930 32

33

Aggregate Other Russia China Canada

Global frac capacity (MM HHP)

Sources: IHS, company reports; industry sources

Notes: “Other” includes Euro Land, Argentina, Australia, Mexico, Other Latin America, Other Africa, Other Asia, MENA, Offshore © 2015 IHS

5-yr Growth22%



International frac capacity is expected to grow 45% from 2015 through 2019

• China, the largest frac market outside NAM (as measured by capacity), is expected to grow 41% between 2015 and 2019, a significant downgrade from YE2014

• Argentina D&C activity is improving; increasing localization of supply chain, along with positive political and regulatory developments bode well for the market

• MENA D&C activity focused on tight formations is ramping up with exploration plans for shale gearing up, primarily in Saudi Arabia and Oman

2013 2014 2015 2016 2017 2018 20190

2

4

6

8

10

12

14

6.1

7.38.0

9.29.9

10.711.6

China Russia Australia Offshore Euro Land Argentina Mexico MENA Other

Frac capacity outside of North America (MM HHP)

Sources: IHS, company reports; industry sources © 2015 IHS

45% Growth



Given current market structures, Argentina, MENA, and China have the most promising development factors



Guar Consumption Trends



Our analysis focuses on actual consumption in the field, not demand for guar powder from Indian suppliers

• Reflects consumption in the field

• Accounts for actual jobs pumped and guar pumped downhole by operators and/or pumpers

• Measures guar mass regardless of origin

• Focuses on chemical properties and benefits of guar usage in hydraulic frac’ing

• Estimates guar demand based on frac’ing activity and past trends in the oil and gas industry

• Demand for powder by oilfield field services companies

• Oilfield chemicals suppliers

• Pressure pumpers / hydraulic fracturing services providers

• Represents purchases from Indian guar producers and traders

• Accounts for guar used and stored

• Tracks relationship with supply closely and identifies response from decentralized agricultural production centers as guar production becomes more profitable than other crops

Consumption Demand



Demand for gelling agents expected to drop by 33% in 2015 as oilfield activity decreases along with oil prices• The market size for gelling agents used during well stimulation is

expected to decrease by 33% in 2015

• The gelling agent market increased 27% per year between 2011 and 2014

• After falling by 33% in 2015 we expect the market to grow 14% annually through 2017

• Moderate shift to slickwater fracs in key plays has tapered market growth since early 2014 and will likely slow future growth

• Recent quarters have seen a decrease in the proportion of wells using a gelling agent, in favor of 100% slickwater systems

• The switch appears to be driven by a combination of cost and effectiveness

• We expect a moderate shift to continue through 2015+, slowing future market growth for gelling agents, though the trajectory of that shift is still emerging



After strong growth through 2014, gelling agent consumption expected to decrease by 33% in 2015

• As of 2014 the market increased by 27% per annum since 2011

• Due to a decrease in D&C activity, we forecast gelling agent consumption to drop by 33% in 2015

• We expect a recovery through 2017 with a 14% CAGR over 3 years

2011 2012 2013 2014 2015 2016 20170

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

US land gelling agent consumption (MM lbs)


2011-2013 CAGR: +27%

2015-2017 CAGR: +14%



The use of gelling has agent has slowly decreased from 75% to 71% of wells in recent quarters

• The proportion of US wells that include Gelling Agent has decreased steadily since early 2011, peaking at 75% in 13Q3

• A recent shift to slickwater fracs has contributed to the decrease in guar usage from recent quarters

11Q1

11Q2

11Q3

11Q4

12Q1

12Q2

12Q3

12Q4

13Q1

13Q2

13Q3

13Q4

14Q1

14Q2

14Q3

14Q4

0%

10%

20%

30%

40%

50%

60%

70%

80%

Frequency of gelling agent usage (% of wells)




Questions & Answers

IHS Customer Care:Americas: +1 800 IHS CARE (+1 800 447 2273); [email protected]

Europe, Middle East, and Africa: +44 (0) 1344 328 300; [email protected]

Asia and the Pacific Rim: +604 291 3600; [email protected]

COPYRIGHT NOTICE AND DISCLAIMER © 2015 IHS. All rights reserved. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent of IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information contained herein is from sources considered reliable, but its accuracy and completeness are not warranted, nor are the opinions and analyses which that are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage, or expense incurred by reliance on information or any statement contained herein. In particular, please note that no representation or warranty is given as to the achievement or reasonableness of, and no reliance should be placed on, any projections, forecasts, estimates, or assumptions, and, due to various risks and uncertainties, actual events and results may differ materially from forecasts and statements of belief noted herein. This presentation is not to be construed as legal or financial advice, and use of or reliance on any information in this publication is entirely at your own risk. IHS and the IHS logo are trademarks of IHS.

© 2015 IHS. ALL RIGHTS RESERVED. INTERNATIONAL SHALE PERSPECTIVE – PRESENT CHALLENGES & OUTLOOK IHS ENERGY Fernando Covas, Director +1 713 980 4446 [email protected].

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