PacWest Consulting Partners 920 Memorial City Way, Suite 160 Houston, TX 77024 Developing Emerging International Shale Plays Supply Chain Challenges &

PacWest Consulting Partners920 Memorial City Way, Suite 160

Houston, TX 77024

Developing Emerging International Shale PlaysSupply Chain Challenges & Constraints

TERMS & CONDITIONS Information furnished in all reports produced by PacWest may be used by Client for internal purposes, as Client deems beneficial, as long as due care is taken to hold the information confidential within Client’s organization and PacWest is not liable for the information provided.

All rights to the information remain with PacWest. PacWest represents that it will not breach any obligation of confidentiality with respect to information contained in the study. PacWest will maintain in confidence and not disclose any information related to Client, without prior written consent of the Client. PacWest will not disclose to any person, including, without limitation, any of the Client’s competitors or suppliers, the fact that Client has engaged PacWest in this project scope, the scope of the assignment or any other information relating to Client.

IAPG Congreso Latinamericano y del CaribeBuenos Aires, Argentina9 August 2012

Alexander [email protected]+1 434 294 1396

IAPG CONGRESO PRESENTATION

© PacWest 2011 | All rights reserved | 2

Agenda

1) Introduction

2) North American Market Update

3) Supply Chain & Infrastructure Constraints

4) International Unconventional Development

5) US Analogue: Bakken

6) Questions



Provide strategy consulting and advisory services to energy, industrial, and resources 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

Consulting & Advisory Offer industry-leading, granular

analysis of the oilfield

Deep knowledge and strength in the pressure pumping / frac market

Employ combination of primary intelligence + secondary research

Unique in market: apply strategy consulting capabilities to turn research into actionable intelligence

Market Intelligence Products

All key staff come from top-tier strategy firms; consulting and market intelligence capabilities reinforce/inform each other

PacWest is a boutique strategy consultancy and market intel firm specializing in energy, industrial, resources; strength in the oilfieldPacWest Overview & Capabilities



Breakdown of pressure pumping fleets/capacity by basin and supplier with strategic analysis of latest regional supply market trends

Interactive database of 100+ critical unconventional suppliers

Cost escalation forecast for major D&C categories

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

Database of fracs including basin, operator, pumper, chemicals, chemical suppliers

Product Description

PacWest Market Intelligence Product Offerings

PacWest currently offers multiple oilfield market intelligence product offerings to support subscriber decision-making

Adding international coverage to PumpingIQ in upcoming quarterly release



Agenda

1) Introduction





6) Questions



Today’s US Hot Spots: Oil/Liquids-rich

Source: PacWest

There are dozens of active plays in the US, but majority of activity has shifted to a handful of key oil/liquids-rich plays

Bakken

DJ Basin/Niobrara

Eagle Ford

Permian Basin

Granite Wash



The dramatic shift to oil/liquids plays over the last three years is highly visible in the US Land rig count

US Rig Count, Oil/Gas Split

Jan-00Jun-00

Nov-00

Apr-01

Sep-01

Feb-02

Jul-02

Dec-02

May-0

3

Oct-03

Mar-0

4

Aug-04Jan-05

Jun-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-07

Dec-07

May-0

8

Oct-08

Mar-0

9

Aug-09Jan-10

Jun-10

Nov-10

Apr-11

Sep-11

Feb-12

Jul-12

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0% % Gas% Oil

Tota

l Rig

s

Source: Baker Hughes Rig Counts, PacWest Analysis

Gas rigs down

Oil rigs up!!



Frac supply has lagged behind demand, but we expect capacity to increase by 16.5% over 2012 to 15.5MM HHP at year-endUS Frac Supply

Frac Capacity (11Q3-12Q4) Comments■ Frac capacity additions have lagged pressure

pumping demand increases until recently, but supply in 2012 has expanded much more quickly than demand

■ We expect frac capacity to increase by 2.2 million HHP over the course of 2012, for a total EOY frac capacity of 15.5 million HHP, an 16.5% increase on EOY2011

11Q3 11Q4 12Q1 12Q2 12Q3 12Q40

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

US F

rac C

apac

ity (M

M H

HP)

+16.5% YoY

Analysis Dated May 2012



There has been a massive redeployment of capacity from key gas plays (-1.1MM HHP) to liquids plays (+3.3MM HHP)US Frac Capacity OutlookFrac Capacity in Key Gas Plays (11Q3-12Q4)

Frac Capacity in Key Liquids Plays (11Q3-12Q4)

Comments■ We expect more than 1.1 MM HHP of frac

capacity to be redeployed from key gas plays during 2012, driven primarily by deployments out of the Haynesville and Fayetteville,

■ We expect aggregate capacity in these 4 key gas plays to total 4MM HHP EOY

■ We expect more modest declines in frac capacity in the Marcellus/Utica and Barnett, as activity in the liquids-rich portions of these plays is creating a softer landing for suppliers

■ We expect a 52% increase in frac capacity in 2012 across the Eagle Ford, Permian, Bakken, Anadarko, and DJ Basin, for an EOY capacity of 9.7MM HHP

11Q3 11Q4 12Q1 12Q2 12Q3 12Q40

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000Marcellus/UticaHaynesvilleBarnettFayetteville

Frac

Cap

acity

(MM

HHP

)

11Q3 11Q4 12Q1 12Q2 12Q3 12Q40

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000 Eagle FordPermianBakkenAnadarkoDJ Basin

Frac

Cap

acity

(MM

HHP

)




Due to the recent shift to an oversupplied market, quarterly additions of new frac capacity are expected to slow dramaticallyFrac Capacity Additions, by Quarter

Frac Capacity Additions (11Q4-12Q4) Comments■ We expect 12H1 additions to comprise

nearly 75% of total 2012 frac capacity additions, 1.75MM HHP

■ Pressure pumpers have canceled or pushed back deliveries of new frac capacity because of expected oversupply issues in many US plays

■ We expect total 12H2 deliveries to total only ~600,000 HHP, or 25% of 2012 capacity additions

■ 12Q4 capacity additions are expected to amount to 72% less than capacity additions in 11Q4

11Q4 12Q1 12Q2 12Q3 12Q40

200,000

400,000

600,000

800,000

1,000,000

1,200,000

798,100

1,028,800

719,500

385,500

222,000

Frac

Cap

acity

(‘00

0s H

HP)

12H1 capacity additions: 1,748,300 HHP

Forecast

12H2 capacity additions: 607,500 HHP

Dramatic slowdown in fleet/capacity additions!!




Over the last six months, US frac capacity utilization has fallen below 100% for the first time in more than two yearsUS Aggregate Frac Capacity Utilization

US Aggregate Capacity Utilization (11Q4-12Q4) Comments■ Pressure pumping demand has outpaced

supply for the last two years, resulting in an aggregate utilization above 100%

■ Available pressure pumping supply surpassed demand in 12Q1, resulting in capacity utilization of 93%

■ We forecast capacity utilization to bottom out at 87% in 12Q2 and increase as pressure pumping demand increases in 12Q3 and 12Q4

■ We expect the year to close out with capacity utilization of 89% in 12Q4

11Q4 12Q1 12Q2 12Q3 12Q480%

85%

90%

95%

100%

105%

100%

93%

87% 88%89%

Frac

Cap

acity

Util

izatio

n

Forecast

Good news: low NAM utilization makes business case for redeploying fleets internationally much more compelling




Agenda

1) About PacWest





6) Questions



Unconventional O/G carries with it significant supply chain and infrastructure implicationsUnconventional Supply Chain & Infrastructure Implications

Competition & Innovation Key■Technology and innovation made shale a reality; requires entrepreneurial supply chain

to optimize for each unique unconventional formation■US has deepest and most entrepreneurial O/G supply chain, competitive environment

Higher Service Intensity■Shale demands increased products/services, requiring more people, more equipment,

more consumables (water, proppant, chemicals), more transportation infrastructure

Advanced Equipment and Experience Required■Most equipment and people will be imported initially; how friendly is import regime?

Infrastructure Availability Key■Production profile of shale gas wells is shorter and steeper than for conventional, so

drilling campaigns have to be closely coordinated with take-away projects- Delay in infrastructure can significantly impact economics



Stimulation

Drillin

g Rig

Water D

isposa

lOCTG

D&C Fluids,

Chemicals

Loca

tion, Roads,

Flowlin

es

Contract

Labor

Artificia

l Lift

Directi

onal Dril

ling

Cementing

Fishing and Rental T

ools

Rig Mobiliz

ation

Bits and Reamers

Wire

line Perfo

rating and Lo

g...

Fuel, P

ower

Servi

ce Rigs

Heaters, Se

parators

Cuttings D

isposa

lTanks

Subsu

rface

Equipment

Wellh

ead, Casin

g Head

New Compresso

rs

Measu

rement

Valves a

nd Fitti

ngs0%

5%

10%

15%

20%

25%

30%

35%

40%

45%39%

11%9% 8%

4% 4% 4% 3% 3% 3% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% 0% 0%

% o

f Tot

al 3

-Yr S

pend

Operator 3rd Party Spend by Category (3-year)

Source: PacWest Analysis; Macquarie

Pressure pumping (frac), drilling rigs, and water will drive nearly 60% of 3rd party costs in many plays

Stimulation/Completion = 39%

Drilling Rigs = 11%Water Treatment/Disposal = 9%

Σ = 59%



As North American unconventional activity has increased, the supply chain has been forced to respond to a series of constraints Recent Areas Experiencing Supply Chain Constraints

Hydraulic Fracturing Services

Source: PacWest Analysis

Frac Equipment

Frac Sand

Frac Consumables

Water

Chemicals (guar)

Infrastructure

Rail Capacity

Storage

Takeaway Capacity

Labor

Frac Units

Frac Pumps

We will briefly talk through each of these



Global pressure pumping capacity is the single largest supply limitation to a rapid ramp up of global shale development

Global Reserves vs. Frac / Pumping Capacity

Source: Halliburton Analysis;, Barclay’s CEO Energy-Power Conference, Sep 2011



Annual frac capacity growth is expected to slow from its recent 33% annualized growth to 10% over the 2012 to 2016 timeframeGlobal Frac Capacity Forecast

2012-2016 Frac Capacity Forecast Discussion■ Total frac capacity growth is expected to

slow through 2016 from 33% to 10% CAGR- High 2008-2011 growth rate was led by

unprecedented 62% YoY growth over 2011 in North America

■ Global frac capacity growth is forecast to reset to a more restrained pace through 2014 and then begin to pick up again in 2015-2016- Increasing growth rates in 2015-2016 led by

NAM natural gas price increases and additions in emerging international shale

■ YoY 2012 capacity growth is forecast to slow from record 2011 high to 16%- Followed by just 4% growth in 2013, which is

expected to see the lowest growth rate over the forecast timeframe

Source: PacWest Analysis; company documents; field staff interviews; PacWest FracDB / FracFocus.org

2008 2009 2010 2011 2012 2013 2014 2015 20160

5

10

15

20

25

30

0%

20%

40%

60%

80%

7.3 8.2

9.9

17.1

19.8 20.7

22.1

24.3

27.6

12%

21%

73%

16%

4% 7%10%

13%

Frac

Cap

acity

(MM

HH

P)

Forecast

CAGR33%

CAGR10%

2011 growth peak

2013 growth trough



Starting in 2014, frac capacity additions are forecast to begin a shift from North America to international marketsGlobal Frac Capacity Forecast, by Region

2012-2016 Forecast Frac Capacity Additions Discussion■ Forecast frac capacity additions

of just 0.6 and 0.8 million HHP in 2012 and 2013 reflect a dropoff in demand for new equipment in North America- NAM continues to be the market

driver, but at significantly lower level than recent years

■ In 2014, international capacity additions are expected to increase significantly, while NAM additions remain flat

■ In 2015 and 2016, international additions are expected to continue to grow- NAM demand is also expected

to return with 7% and 9% growth, respectively


2011 2012 2013 2014 2015 20160

1

2

3

4

5

6

7

8

7.2

2.7

0.8

1.4

2.2

3.3

Frac

Cap

acity

(MM

HH

P)

93%

7%

88%12%

58%

42%

60%

40%

43%

57%

78%

22%

Good news: frac equipment manufacturing capacity is in

place to support international frac demand



Unconventional wells require significant amounts of high-quality frac sand, as well as resin-coated and ceramic proppantUS Aggregate: Frequency of Proppant Usage

Frequency of Proppant Usage (% of wells) Comments■ Frac sand is the most common

proppant type, used in 96.8% of wells

■ Resin-coated sand is the second-most common proppant type, used in 13.5% of wells

■ Ceramic proppant is the least common proppant type, used in 2.9% of wells

■ N.B. percentages do not add to 100% because more than one type of proppant is typically used in a single well

■ N.B. sample size is small in April 2012 and May 2012 due to reporting lag, so conclusions are uncertain for these time periods

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11Jul-1

1

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

200

400

600

800

1,000

1,200

1,400

Wells Sand Resin-coated Sand Ceramic

Freq

uenc

y of

Pro

ppan

t Usa

ge (%

of W

ells)

Sam

ple

Size

(Wel

ls)

Source: PacWest analysis; PacWest FracDB / FracFocus.org

Sand is proppant of choice, used in 97% of wells



Frac sand demand is expected to grow steadily in North America; does not even consider emerging international demand

Frac Sand Demand ForecastFrac Sand Demand Outlook Discussion

■Sand supply and demand have balanced out in the last 6 months as significant new frac sand capacity has hit the market

■Primary constraint in NAM frac sand is no longer the sourcing / mining, but the logistics operation

■Single frac may require as many as 25 railcars of frac sand, making the logistics of getting sand from mine to well a logistics challenge


2012 2013 2014 2015 2016 2017 20180

20

40

60

80

100

120

140

Other Grades 40/70 30/50 20/40

Million Tons

5260

69

80

94

109

127CAGR (2012-2018) = 16.0%

Lots of sand capacity in NAM, but where will Argentina frac sand come from??



Forecast

Guar prices spiked over 2011-2012 due to seedstock constraints and rapidly increasing demand, resulting in price spikes

Guar Gum Supply/Demand

Guar Gum Supply vs. Demand Discussion■ Wholesale prices for oilfield

guar have climbed to nearly $25/kg over the last year, from a typical historical price of $1.50/kg

■ High wholesale prices have stressed the margins of pressure pumpers

■ There has been much speculation of a shortage of guar gum in the summer but there have been no reports yet of a shortage in the field

■ Based on recent PacWest work in India to assess guar supply market, probability of a guar shortage in the next six months is highNote: Capacity represents end-of-year capacity, not average capacity


‘000 Tons

-

100

200

300

400

500

600

700

800

900

1,000

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$6,000

$3,250

$8,500 $10,250

$15,750

$9,250

Supply DemandEstimated Avg. Prices

2008 2009 2010 2011 2012 2013 2014 2015 2016

$/Ton

Prices are FOB Mundra

Price spike!!



Guar price increases forced NAM pressure pumper costs to double to nearly $1 billion during 2012 Q2

US Total Guar Consumption by Pressure Pumper

Estimated 2012 Q1 vs. Q2 Guar Costs Discussion■ Guar costs increased an

estimated 95% from 2012 Q1 to 2012 Q2- Due to both price increases and

larger purchases

■ Pressure pumpers spent an estimated $478 million on guar to support 2012 Q1 US oilfield activity- Based on an estimated average

2012 Q1 price of $11,000 per ton for oilfield grade guar powder


Halliburto

nBHI

Schlumberg

erFT

S

Weath

erford

Pumpco

Superior

Calfrac

Trican

C&J

Universal

CuddSanjel

Other

$-

$50

$100

$150

$200

$250

$300

2012 Q12012 Q2

Mill

ion

$

Q1 Total = $478 millionQ2 Total = $930 million

95% increase

Major cost impact QoQ



Rapid growth of hydraulic fracturing activity has driven significant increases in the use of water in the oilfieldFrac Water Demand: Demand & Flowback

Source: PacWest analysis; PacWest FracDB / FracFocus.org; Newfield Exploration

Hydraulic Fracturing Water Demand■ In 2011, the average unconventional/shale frac in the US consumed

65,000 barrels of water (2.7 million gallons)

Flowback■ Water that flows back within 15-

45 days after a frac job is called “frac flowback”

■ Average of 10-35% of the total water pumped downhole flows back during the flowback period- Average of 7,000-23,000

barrels of water (0.3-1.0 million gallons)

- Some areas (Mississippi Lime) flowing back nearly 100%!!

■ Flowback water is handled in one of several ways:- Disposal via injection well- Treatment and re-use for

other frac jobs- Evaporation via ponds (largely

restricted to Rocky Mountain region)

That’s a lot of water!!



Water Constraints

Many areas face constraints for water sourcing and disposal, adding costs to operations and, at times, halting operations

Source: PacWest Analysis; Conestoga-Rovers & Associates; WorleyParsons; additional expert interviews with operators and service providers

Region/Basin Constraints Drivers

Marcellus

Bakken

Barnett

DJ Basin

Eagle Ford

Fayetteville

Haynesville

Permian

San Juan

Granite Wash

Lack of Disposal Wells, Regulatory Pressure

Water Quality, Infrastructure Constraints

Water Scarcity

Water Scarcity, Regulatory Pressure

Water Scarcity, Infrastructure Constraints

Lack of Disposal Wells

Water Scarcity, Lack of Disposal Wells

Water Scarcity

Regulatory Pressure, Water Scarcity

Water Scarcity

HLLegend:

Constraints are driving increased water treatment/reuse; environmentally positive, but costs $$



Shortage of oilfield labor has constrained service capacity in North America; labor availability even more limited internationallySupply Chain Constraints: Labor

■Shortage of oilfield labor is the primary constraint to deploying new frac fleets

■Shortage of labor to staff up drilling rigs is also the key constraint holding back the rig count

■Labor shortage is particularly acute in the Permian and Bakken plays, where between 40% and 50% of oilfield labor travels from other areas

■Average experience of deployed oilfield personnel has decreased dramatically over the last two years as service providers have hired anyone available

■Arguably the MOST difficult to address, particularly given the industry-wide challenge of experienced staff retiring over coming years

Potentially hardest problem to address!!



Infrastructure constraints are often at the root of supply chain constraints; fracs require massive volumes of material inputsCritical Infrastructure Constraints & Risks

Rail Capacity Takeaway Capacity■ Siting and constructing new

pipeline capacity for hydrocarbon ‘takeaway’ requires 2+ years

■ Prior to development of pipeline capacity, rail is the preferred method to transport hydrocarbon- Use of rail for takeaway

exacerbates frac consumable transport

■ Trucks are easiest, but most expensive transport method!!

Storage■ Storage capacity is a critical

infrastructure component that helps service companies manage equipment and consumables

■ Proper storage facilities are critical to maintain quality of high-grade frac sand and other completion chemicals

■ Limited storage infrastructure has led to shortages of critical materials that were not available for delivery to wellsite for frac

■ Fracturing a well requires large volumes of consumables, particularly sand and chemicals- Typical Bakken well

requires 15 railcars of sand

■ Rail is generally the only cost-effective method to transport these materials to a region

■ Transloading facilities and railcar capacity are common capacity constraints

Neuquen benefits from existing infrastructure, though investments will be required as activity increases



Agenda

1) About PacWest





6) Questions



The EIA’s 2011 study of shale gas resources sized up resources across 14 regions outside the US

Global Shale Resources

Source: EIA, World Shale Gas Resources Report



A study by the Baker Institute forecasts shale gas production across key regions through 2040

Global Shale Resource Estimates & Production Forecasts

Source: EIA, World Shale Gas Resources Report; Baker Institute, Shale Gas and US National Security

China

USA

Argentina

Mexico

S Africa

Canada

Libya

Algeria

Brazil

Poland

France

India

- 200 400 600 800 1,000 1,200 1,400

1,275

862

774

681

485

388

290

231

226

187

180

63

2010 2015 2020 2025 2030 2035 20400

10

20

30

40

50

60

70

IndiaFrancePolandBrazilAlgeriaLibyaCanadaMexicoArgentinaUSAChina

Global Shale Resource Estimates (bcf) Gas Production Forecasts (tcf)



However, more than just technically recoverable resources are required to successfully produce unconventionals; many critical risk factors

Non-Technical Risks Factors


Demand

Supply Chain

Domestic E&P Industry

Markets

Regulatory Frameworks

Infrastructure

Development Constraints

The level of natural gas demand within the country and neighboring countries that can serve as consumers

Water, population densities, political/social acceptance, etc.

Quality of existing supply chain, number of rigs currently in-country, ease of entry for new players, etc.

Number of existing domestic E&P firms, level of unconventional experience, ease of entry, etc.

Regulatory structure, midstream/downstream demand dynamics, etc.

Fragmentation, tax policies, government incentives for unconventional development, etc.

Quality of existing midstream, ease of developing new infrastructure, etc.



2011 2012 2013 2014 2015 20160

1

2

3

4

5

6

2.4 2.5

3.2

4.0

4.8

5.6

International frac capacity is forecast to grow 133% over the five years to 2016 to a total of 5.6 million HHPInternational Frac Capacity Growth Forecast

2011-2016 International Frac Capacity Discussion■ International capacity is generally

manufactured in NAM- China is exception; bulk of capacity

likely manufactured in-country

■ Russia is currently the largest int’l frac market; expected to maintain that lead with healthy growth

■ Australia capacity demand is growing and it is forecast to experience the largest growth rate

■ Offshore market will likely see steady stim vessel demand growth

■ China will see strong growth, though much of its demand could be satisfied internally

■ Argentina activity will likely increase driving capacity demand

■ Mexico and Middle East/North Africa likely see frac demand as wellNotes: Internationally deployed frac equipment is generally built and produced in NAM


Frac

Cap

acity

(MM

HH

P)

Russia

MexicoMENA

Poland

Argentina

China

Offshore

Australia

Other 100%233%300%150%

60%

167%

52%

700%

114%

Region5-Year

Growth

5-Year International Growth = 133%

International capacity is forecast to more than double!



Argentina has made steady progress on unconventional resources and has drilled/completed more shale wells than any region outside NAM

Argentina Activity & Supply Chain Update

■More than 125 unconventional wells expected to be drilled and completed by 2012 end-of-year (25 in 2011, 100 in 2012)- Mostly small (3-5 stages) vertical wells, several multi-stage horizontal- Multi-stage horizontal wells extremely expensive: $24 million for the 1st (Apache)- YPF leading development activities, accompanied by multiple NAM E&Ps

■Major service centers already established and service companies are steadily adding fracturing equipment/capacity- ~15 rigs active in-country (H&P, Nabors, others); ~2 rigs per frac crew- Estimated 190,000 HHP (8 fleets) in-country – additional deployments planned??- Schlumberger, Halliburton, Baker Hughes, Calfrac, San Antonio, Weatherford –

others??■Infrastructure sufficient to support early-stage activity

- Established oil and gas pipeline network- Capacity available within existing network, including export capacity

■Experienced oilfield labor; augmented by NAM staff with hands-on shale experienceStrong candidate to be one of the first major unconventional resource

basins to be developed outside of NAM



Poland was once the primary focus for international shale efforts, but slow progress has dimmed optimism

Poland Activity & Supply Chain Update

■More than 50 unconventional wells drilled by 2012 end-of-year (10 in 2011, 40+ in 2012)- Only 6-8 of ~25 wells to date were horizontal, only 4 wells completed- Mixed results, with multiple wells drilled by key operators (i.e. PGNiG, Marathon,

BNK, Orlen) with gas shows from multiple wells- Exploration programs on-going with many more wells to drill under concessions- ExxonMobil pull out was blow to optimism , though geopolitics had bigger role

■Leading service companies have set up bases and/or partnerships to operate in-country- Schlumberger, Halliburton, Baker Hughes all have bases established; Weatherford - Schlumberger completed 13-stage frac for 3Legs Resources, largest to date- Capital beginning to flow to develop domestic supply chain: United Oil Services

■Infrastructure limited and may potentially slow development efforts- Logistics/ transportation issues already emerging

■Extremely small domestic E&P industry means that nearly all labor imported



Australia has made meaningful progress on CBM, just starting with shale; supply chain constraints already emerging

Australia Activity & Supply Chain Update

■Strong geology, economic incentives, regulatory framework■More than 1,000 CBM wells drilled to date, though far short of 3,000-well target; shale

development just beginning- Significant stakeholder issues with CBM, particularly focused on water, has halted

some activities- Numerous domestic and international operators participating- First multi-stage horizontal shale well just completed; Cooper Basin, Beetaloo,

Kidson, Perth, and Eromanga sub-basins are targets of activities- D&C costs for shale well likely in excess of $20 million

■Significant supply chain bottlenecks emerging across multiple products/ services – need for greater supply chain support- Both rigs and fracturing equipment scarce- Less than 100,000 HHP of fracturing capacity currently in-country; far more needed- Halliburton, Baker Hughes, Schlumberger, Trican operating- Water sourcing for fracturing will present challenges

■Infrastructure availability inland poses challenges■Oilfield labor available due to major offshore projects, but Australia labor is expensive



There have been some recent roadblocks to shale production in select countries around the world

Global Shale Progress

Source: EIA, World Shale Gas Resources Report

■ Canada: Quebec put temporary moratorium in place

■ France: Shale moratorium in place, halting exploration activity in the highly promising oil-bearing Paris Basin

■ UK: Has seen protests, then embrace by government; Cuadrilla put its exploration activities on hold after minor seismic activities during drilling

■ Sweden: Has seen protests to Shell’s exploration activity

■ India: Licensing round delayed until 2013

■ South Africa: Temporary moratorium in place pending assessment of environmental impact report; multiple delays

■ EU: Considering stricter shale guidelines to the protests of Poland

■ Bulgaria: frac moratorium in place, though politicians already reconsidering hasty decision



One thing to keep in mind is how supply chain needs differ for exploration versus development phases

Exploration vs. Development Phase

Data collection exercise Goal: collect enough data to prove that

hydrocarbons are present Priorities: speed, logistical simplicity Willingness-to-pay: relatively high Staffing: in-country team small

Exploration Phase Supply chain development and mgmt Goal: build a long-term supply base that

will help you reduce costs and optimize production, while minimizing risks

Priorities: cost management, diversification

Willingness-to-pay: low to moderate Staffing: build local resources

Development Phase

Bundling strategies are common to simplify logistics, mgmt, admin

Work with local equipment providers (i.e. rigs) if possible for speed

Big 4 and majors often best positioned

More likely to distribute work between majors and local players

Willing to invest time/effort in building local supply base

Fwd-looking sourcing strategies

Implications



Agenda

1) About PacWest





6) Questions



The US Bakken play has boomed over the last three years, placing significant strains on existing infrastructure and supply chain

The Bakken Formation

Source: Continental Resources

Formation Huge contiguous oil accumulation

spanning North Dakota and Wyoming in the US, Saskatchewan and Manitoba in Canada- ~14,700 square-miles; largest ever

assessed by USGS

Challenges Existing infrastructure limited Has seen tremendous growth over last

two years Growth has placed major strains on the

supply chain Effectively starting from zero

US Analogue: Bakken



Since late-2009, the rig count has increased 2-3x, with counts forecast to remain above 200 rigs

0

20

40

60

80

100

120

140

160

180

200

Directional/Horizontal

Vertical

Bakken Rig Count & Forecast

Rig Count – Dir/Hor vs. Vertical Average Rig Count ForecastLand Rigs Land Rigs

2011 2012 2013 20140

50

100

150

200

250

180200 210 220

Source: PacWest Analysis; Macquarie; Baker Hughes



Overwhelming demand in the Bakken led to a significant under-supply of pressure pumping capacity in 2011

15 20 25 300%

50%

100%

150%

200%

250%

100%133%

166%

199%21%

28%

35%

42%2011 completions + backlog

2011 completions

Average Stages per Well

Pres

sure

Pum

ping

Cap

acit

y U

tiliz

ation

121%

161%

201%

241%

Sensitivity Analysis of 2011 Bakken Pressure Pumping Capacity Utilization

Sources: CIBC World Markets; Macquarie; PacWest analysis

100% utilization of

2011 capacity

The Bakken will be 61% under-supplied in 2011, conservatively assuming 20 stages/well



30% 40% 50% 60%0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

114% 109% 104%100%

45% 43% 42% 40%

2012 completions + backlog2012 completions

Capacity Growth (2011 – 2012)

Pres

sure

Pum

ping

Cap

acit

y U

tiliz

ation

159% 152% 146% 140%

Sensitivity Analysis of 2012 Bakken Pressure Pumping Capacity Utilization

100% utilization of 2012

capacity

Source: CIBC World Markets; Macquarie; PacWest analysis

For approximately two years, demand for pressure pumping capacity outpaced supply

Note: Sensitivity analysis assumes an average of 20 frac stages / well in 2012, a conservative estimate



Staffing experienced crew has been a critical challenge faced by pressure pumping service providers, particularly in the Bakken

■Completion increases = HHP increases = Frac crew increases = Need for trained staff!!■North American pressure pumping industry is expanding rapidly (~20% YoY increase

2010-2011) and needs to add new hires to meet expansion targets■Major increases in completions require major increases in frac crews, for example:

- Typical 25K HHP frac fleet in the Bakken requires 2-3 crews of 30 staff = 60 – 90 experienced employees

- PacWest forecasts an increase in frac fleets in the Bakken from 38 fleets (May 2011) to 52 fleets (year-end 2011) = 840-1,260 experienced employees

■Fact: Critical driver of oilfield safety = experienced staff■Problem: There are no more experienced field workers left; pumpers are forced to

manage deployment of large numbers of inexperienced employees

The Quality vs. Quantity Dilemma



Supply chain constraints held back the deployment of new equipment and the ability to consistently supply pumping services

Logistics■Railway (primarily BNSF) import capacity into the Bakken is limited for all products,

particularly proppant due to the large volumes required (1 railcar has capacity of 200K lbs of proppant; average 3 million lbs frac job requires 15 railcars)

Proppant■Global proppant consumption has reached unprecedented levels and most domestic

producers are essentially sold out of product■Greatest constraint is in 20/40 raw sand

Guar■Demand has reached record highs and the guar supply chain is not highly responsive

due to its length (90% of raw guar seed grown in rural India)

Equipment■Manufacturers of pumping equipment reporting order backlogs of up to 1 year

Labor■Local labor force in the Bakken is limited and unemployment is extremely low

Bakken Supply Chain Constraints



Bakken pressure pumping supply was unable to keep pace with demand resulting in a significant well completion backlog

Mar-0

9

Apr-09

May-0

9Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-1

0

Apr-10

May-1

0Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-110

60

120

180

9067

85 7650

87 7296

5781 67

8280 81

10399 95 98 103 107

93118

172

Day

s be

twee

n W

ell

Spud

and

Com

pleti

on

Uncompleted Drilling Permitted

North Dakota 372 156 346

Montana 57 6 67

Bakken 429 162 413

50150250350450

Num

ber o

f Wel

ls

Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis

Days Required for D&C in North Dakota

Bakken Well Count (May 2011)



Operator D&C performance varied, in some cases depending onsupply chain sourcing and contracting practices

Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis

Oasis Petroleum

Marathon

EOG Resources

Newfield

Slawson

Hess

ConocoPhillips

Brigham Oil & Gas

Zenergy

Whiting Oil & Gas

Continental Resources

Anschutz/OXY

0 1 2 3 4 5

4.53.6

3.43.0

2.82.7

2.62.4

2.01.9

1.81.0

Bakken Ratio of Uncompleted Wells to Active Rigs (May 2011)

7

45

29

12

17

13

48

17

15

34

25

27

Well Backlog

7

25

15

6

7

5

18

6

5

10

7

6

Rigs

Note: Well backlog is best estimate based on data from Montana and North Dakota oil/gas regulators; rig count is from April 2011

Backlog was result of frac equipment shortages



Agenda

1) Introduction





6) Questions

Documents

PacWest Consulting Partners 920 Memorial City Way, Suite 160 Houston, TX 77024 Developing Emerging International Shale Plays Supply Chain Challenges &