The Shale Gas Revolution

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The Shale Gas Revolution: What You Need to KnowThe Global Energy Landscape is Shifting and It Starts in North America.

This whitepaper will discuss the shale revolution, its implications on the U.S. and global economies, and how midstream oil and gas companies are responding to accommodate the influx of shale in the US. Furthermore, we will explore the controversies surrounding the fracking process and what is at stake on both sides of the debate.

www.allegrodev.com Page 2/14The Shale Gas Revolution: What You Need to Know

IntroductionThe history of shale gas production in the United States (US) is fairly recent, despite the first recorded extractions occurring in Fredonia, NY in 1825. The shallow, low-pressure fracturing technology used in that instance has only recently matured to a level where industrial-scale shale gas production has become practical.

It wasnt until 1976, when the US government began investing in gas research, as part of the Eastern Gas Shales Project, that the tides began to turn. From 1980 to 2000, tax incen-tives promoted shale drilling domestically. As technology advanced, the US Department of Energy upped the ante by subsidizing Texas-based Mitchell Energys first horizontal drill in the north Texas Barnett Shale in 1991.1

Since then, a shale revolution has occurred in the US that stands to turn global energy production upside down.


US Shale Production: Sparking a Global SwingAccording to the International Energy Agency, the US is on track to surpass Russia as the largest natural gas producer, and Saudi Arabia as the largest oil producer, by as early as 2017. The reason: a shale production boom spurred by hydraulic fracking and deepwater drilling. Currently importing 20 percent of its total energy, the US is set to become a net exporter of oil by 2040. Add Canadas rich Alberta oil sands to the equation, and North America could become a net exporter by 2030.2

In the US, Texas leads the way. But it is by no means the only major shale play on US soil. In terms of their size of potential, the three biggest shale plays in the US are:3

Bakken-Three Forks, North Dakota: Originally discovered in 1951, this 200,000-square-mile formation effectively launched the US shale revolution when EOG Resources began horizontal drilling and hydraulic fracturing in the Parshall field in 2006. To date, most drilling activity here has taken place above the lower shale source rock. As exploration and production go deeper, it is estimated that about 45 billion barrels of oil reserves lie beneath. As of January 2013, total rig count here was set at 185, averaging just over 11,000 barrels of oil production per well. In December 2012, North Dakota produced roughly 25 billion cubic feet of natural gas. Due to the continued shortage of natural gas infrastructure, compression and capacity, close to 30% of gas production is being flared.21

Eagle Ford, South Texas: Stretching approximately 300 miles, from Mexico to San Antonio to Austin, Texas, the Eagle Ford contains dry gas, natural gas liquids and oil in a brittle, high carbonate shale formation suitable for fracking, at depths much lower than those found in Bakken. The first company to drill here was Petrohawk in 2008. Since then, the region has become the largest single oil and gas development in the world, reaching $28 billion in capital expenditures in 2013, and producing an estimated 500,000 barrels of crude oil or more per day since 2012. As of January 2013, 232 drilling rigs were actively feeding the midstream pipeline.

Permian Basin, West Texas/Southeastern New Mexico: Just northwest of Eagle Ford, straddling West Texas and Southeastern New Mexico, the Permian Basin covers about 9,000 square miles. Conventional oil and gas production here dates back to the 1920s, with the most recent surge of activity occurring since 2010, when enhanced oil recovery and hydraulic fracking techniques began producing upwards of 740,000 barrels of oil per day on the Texas side alone. Rig counts in January of 2013 were at 378, with most still drilling vertically. However, based on data gathered from more than 600 recently drilled horizontal wells, the combined recoverable oil here is estimated to exceed 50 billion barrels, primarily from shale formations. The Texas side of the basin accounts for the highest concentration of drilling rigs worldwide.


Other significant shale plays in the US include:3

Niobrara Formation, Northeast Colorado/Northwest Kansas/Nebraska/ Wyoming: More than 70,000 square miles. Crude oil, natural gas, NGLs. 896 wells drilled from 2009-2012, reaching 26,000 barrels per day by mid-2012.

Utica-Point Pleasant, From Tennessee to New York to Quebec/Centering on Ohio: Estimated 8.2 billion barrels of recoverable oil and gas at a 5 percent recovery rate in Ohio alone. Well-suited for hydraulic fracking. In January 2013, 29 rigs in Ohio, most drilling oil.

Monterey/Santos Formation, California: Spanning 1,750-square-miles of central and southern California. Estimated 15.4 billion barrels of oil, more than double the amount estimated in Bakken. Anti-drilling sentiments in California may be changing. Currently considered a future play.

Tuscaloosa Marine, Southeastern Mississippi/Louisiana: Estimated 7 billion barrels of recoverable oil. Early 2013 explorations by Encana Corp. averaged 933 barrels of oil equivalent (boe) per day at Anderson 17H well and 740 boe per day at Weyerhaeuser 73H-1 well.

Woodford, Oklahoma: Covers 3,300-square-miles with oil windows possibly deeper than 10,000 feet. Conoco and Halliburton are currently assessing the play.

Marcellus Shale, Pennsylvania/West Virginia: 2013 production in Pennsylvania alone is up nearly 50% over last year, producing about 1.5 trillion cubic feet of gas with projections for 3.2 trillion cubic feet by year-end (or about 550 million boe); West Virginia is also on track to exceed 2012 numbers by 50%.22


Worldwide Interest In Shale ExplorationGlobally, the opportunities appear even larger.4 According to a recent survey by the Energy Information Administration, China, Mexico and Argentina host massive stores of shale oil and gas; Russia, most of Africa and the Middle East were not included in the survey. According to the findings, the US ranked second behind China as the most promising basin. Considering recent activities, the shale boom has become a worldwide phenomenon.

With an estimated 36 trillion square meters of reserves underground, China has made shale gas development a priority. The Chinese government is now partnering with the US Unconventional Gas Technical Engagement Program (UGTEP) to identify drilling locations.

In Mexico, PEMEX, a national company, began drilling in northern Mexico. Progress has been slowed due to lack of infrastructure, negotiating delays and political complications.

In Argentina, the government nationalized its primary producer, YPF S.A., controlling 51 percent of the shares. Subsequently, Chevron entered into a $1.24 billion joint venture with YPF aimed at producing shale gas and tight oil.4

Unconventional Methods: Rewriting the Rules

By its nature, shale extraction is considered an unconventional form of production, involving first mining the oil and gas upstream, then processing the gas for mainline distribution. In phase one, a well is drilled, first vertically, then horizontally to better penetrate the reservoir strata. The borehole is then encased in steel pipe and concrete to prevent it from collapsing. Next, small perforations are made in the casing, allowing oil and gas to flow into the pipe. Finally, the well is fracked by injecting water, proppant and chemicals into the pipe at high pressure. This fractures the rock layer, props it open and allows the resource to flow freely. In production, the well is topped with a collection of valves and pumps that control the flow, improve recovery and transfer the gas to the midstream distribution network.3

When the Bakken formation was first being mined, the drilling operation often took months to complete, followed by several more months in fracking. However, with the growing interest in shale development over the past decade, both extraction and process-ing technologies have advanced to a point where drilling and completion cycles, along with cost, have become dramatically compressed.

Advances, such as steerable rotary bits, pad and multipad drilling (drilling several wells from a single surface location) and zipper fracking (perforating parallel wells at alternating intervals), have made it possible to complete shale wells in as little as a week, reducing cost, rig count and overall surface impact, while also enhancing productivity.


To Frack or Not to Frack: Whose side are you on? For all the promise these discoveries and advancements hold out to nations starved for energy supply worldwide, there are still strong forces working against the shale production movement most notably, environmental concerns about fracking.

Opponents cite potential groundwater contamination (chemicals forced into or released by wells), depletion of fresh water (consumed in the hydraulic process), air quality risks (such as benzene and silica dust), noise pollution, spills, flow-backs and related health risks as reason enough to resist drilling.5

In densely populated areas, such as New York, California and the majority of Europe, fracking has been met with popular resistance. To control the industry, some governments have been pressured to enact legislation limiting drilling activities.

Germany instituted a moratorium on shale gas drilling in March, 2011. 8

France banned hydraulic fracking altogether in September, 2011. 8

Bulgaria followed suit, banning fracking later that same year. 8

In April, 2013, the Sierra Club filed suit to block drilling on public lands in Californias Monterey, San Benito and Fresno counties.6

A month later, the New York Supreme Court upheld drilling bans in Dryden and Middlefield, stopping fracking practices in parts of New Yorks Marcellus shale formation.7

Even Hollywood and the media have joined the fray. In 2010, the anti-fracking film, Gasland, was released. This misleading film depicted a Texas landowner lighting the contents of a garden hose on fire as evidence of water contamination caused by fracking. The courts later determined the scene to be a publicity hoax.

In 2012, the movie Promised Land, was similarly debunked. The movie, starring Matt Damon and funded by the United Arab Emirates, was based on an unsubstantiated claim that hydraulic fracking had contaminated drinking water in homes in rural Pennsylvania. The EPA investigated the claims and found no harm. Hollywood pressed forward with its fiction anyway.5


So, is there a problem with fracking?

According to the Texas Water Development Board, in 2010, water consumption for all Texas-based mining, including oil and gas, accounted for only 1.6 percent of the water consumed statewide, compared to 55.9 percent used for irrigation. To put that in perspective, Texas is the largest shale producer of all 50 states; 2010 was a high tide for shale gas drilling.

According to the Texas Railroad Commission, the state overseer of oil and gas activities in Texas, not a single case of groundwater contamination has been documented relating to hydraulic fracking in over 60 years.3

Regarding air quality, when media reports from the Barnett Shale asserted that dangerous amounts of benzene were being emitted across North Texas, actual tests of 126 gas wells showed no detectable evidence of the gas. A subsequent six-month study showed that only two of 94 wells exceeded acceptable limits, while 19 others might require facility action.18

If there is a concern, it may be related to fracking and earthquakes. The US National Academy of Sciences has drawn a correlation between fracking and wastewater disposal, which involves pumping wastewater into fracked reservoirs for storage (not oil and gas activities). Geology magazine published a study suggesting that wastewater injections may have played a part in the Oklahoma earthquake of 2011. The smoke surrounding these findings may draw regulatory heat on shale operators in the future.


ENERGYS 30-YEAR JOURNEY

8.7 M bbls/day

7.1 M bbls/day

1,259 Billion KWH

1,502 Billion KWH

U.S. Oil Production

Coal

83

83

12

83

13

$2.50/mcf13

$3.50/mcf

83

9,871KWH

13

13,146KWH

13

12,600MMT

83

6,648MMT

Natural Gas

Electrical

Global EnergyConsumption

What Will The

Look Like in 2040?

FUTURE PROJECTION

MoreDependentExporter

Needing Fuel and Electricity by 2040

Non-OECD Nations Demand More

Most in Asia Pacific and Africa

9 BILLIONPEOPLE

MORE

for Residential and Commercial Use

OIL, GAS, COAL, BIOMASS AND

ELECTRICITY

2013 204065%MORETransportation Fuel

50%MORE

Energy Needed for Chemical

Production

20402013

85% SPIKEin Global Electricity Demand

WELCOME TO THE

SHALEREVOLUTION

Will Gas & Tight Oil Fuel North America's Rise?

Gas Approaches Oil as the #1 Source

Renewables Rise Dramatically

ENERGY MIXWhere Will We

Find the Energy?

CLEAN FUEL OECD Nations Slash CO2 Emissions 20%

OECD

North America Becomes an Exporter as Europe and Asia Become More Dependent

REGIONAL ENERGYBALANCES SHIFT

Non-OECD

Technology Increases New Liquid Supplies by 30%

UNCONVENTIONAL FUELS

SOURCESBP Energy Outlook 2030, January 2013.The Outlook for Energy, A View to 2040, 2013.

GROWING DEMAND

EFFICIENCY BECOMES A VIABLE SOURCE OF ENERGY

500 QuadrillionBTUs saved


Follow the Money: Economics Make a Strong CaseStill, the economic factors associated with shale exploration and production weigh heavily in the industrys favor.3 Natural gas is available, reliable, affordable, efficient and clean, emitting up to 60 percent less CO2 than coal in electricity applications. Its desirable characteristics put it in high demand worldwide.9

In 2011, industry researchers pegged the global shale-gas market at $26.66 billion.11 PricewaterhouseCoopers claims that by 2035, shale oil production could boost the world economy by up to $2.7 trillion.12

ExxonMobils 2013 Outlook for Energy: A View to 2040, named natural gas the fastest-growing major fuel source worldwide, with North America projected to produce 20 percent of the worlds fuel supply by 2040. That same report predicted the US would become a net exporter of oil and gas by 2030, with 80 percent of gas supplies coming from local, unconventional resources.9

Of course, with overwhelming production volume, the shale revolution will require new midstream gathering and processing facilities, as well as mainline transportation and storage and that means jobs, which also means tax revenue. According to the Equality of Opportunity Project, a publicly funded research effort formed to study upward social mobility, children in lower income households stand a better chance of becoming top quintile earners if they live near certain geographies. Interestingly, the study showed that children raised in Williston, North Dakota (near the heart of the Bakken formation) had the highest probability of rising to the top of any in region in the US, with surrounding Williams County having the lowest county unemployment rates in the US.

Said Dr. Mark J. Perry, an economics professor at the University of Michigan, of the findings, proximity to shale oil fieldsis bringing wealth, prosperity, jobs and upward income mobility to (North Dakota).10

In West Texas, similar success can be found. The Midland-Odessa Regional Economic Index for April, 2013 reported a 7.3 percent increase in general taxable spending over the last 12 months, along with the strongest jobs growth in the nation at 7.6 percent year to date. Meanwhile building permit valuations for the area surpassed $98 million in April, the fifth highest month on record; single-family residential construction permits exceeded 100 for the fifth straight month. While the rest of the nation was in an economic down-turn, West Texas was on a roll, despite the regional petroleum index flattening, albeit at a high level, over the previous nine months.19

The fact is, you dont need a college degree to appreciate what shale production brings to the American economy. Average oil and gas workers can easily earn upwards of $100,000 a year without a college education.

According to a recent report on Americas Energy Security and Innovation, Dr. Daniel Yergin estimates that US energy production now accounts for 1.7 million jobs,


including actual employment in the sector, plus jobs created by collateral spending and energy related businesses. For a nation concerned about energy, national security and financial hard times, the shale revolution holds out be best hope for good news ahead.20

A Rich Product Mix

Where there is shale production, there is opportunity. Hydrocarbons recovered in shale plays yield many types of marketable products, including oil, condensate, dry gas, mainly consisting of methane with little or no liquid condensate, and wet gas, including liquid blends of methane with higher hydrocarbons.13

During the midstream process, the raw natural gas is processed to produce pipeline-quality dry natural gas used as fuel in residential, commercial and industrial applications, and for power generation. The remaining liquids in the gas stream are called natural gas liquids, or NGLs, and undergo a further process (called fractionation) to extract the individual components of the liquid stream into ethane, propane, butane and natural gasolines, used in industrial and chemical applications. Once fractionated, the components are then transported via rail cars, shipping barges, tankers and pipelines to destinations where they are further processed, marketed or stored.14

Midstream Infrastructure and Foreign Investments

The related midstream logistics industry is a market unto itself regarding evolving technologies and growth opportunities. Over the next 25 years, it is estimated that US transmission infrastructure improvements will cost upwards of $5.7 billion per year, with gathering and processing plants adding another $2.6 billion annually.15

Foreign investors are eager to participate. Joint ventures with companies based in Canada, Mexico, China, Japan, Australia, Korea and, even France, account for more than 20 percent of the $130 billion invested in US shale plays between 2008 and 2012. And, while the US Energy Department has yet to allow exports of natural gas to outside investors, the deals represent an opportunity for foreign companies to gain valuable experience in horizontal drilling and hydraulic fracturing technologies, as their US counterparts raise necessary financial support to build out their programs.16

If all the speculation of a global shale oil boom holds true, and there is no reason to believe it will not, OPEC nations will likely be pressured to cut oil production. That said, during their 163rd meeting in Vienna last May, OPEC ministers agreed to stay the course, maintaining output levels despite pressures by 12 member nations to prop up prices by tightening production.17


Volatility: Managing the ChaosAs the story continues to develop, one thing is certain to characterize the exploration and production of shale oil moving forward: volatility.

Unlike the conventional oil and gas sector, where investments can reach the billions and profitability is often measured over decades, shale and tight oil economics occur over a compressed timeframe. A producer obtains a drilling lease, brings a well on line, and in a few weeks, peak production can be achieved. However, by the end of the first or second year, the well may be producing at less than 50 percent, driving operations quickly to a close.

In a shale operation, the price of oil and NGLs over the short-haul is of primary importance; time your investments a little too early or a little too late, and you can fall victim to a major market swing. In addition, transportation and fractionation costs must also be factored in, along with royalty and rights management, regulatory reporting and compliance. Each can weigh heavily on your overall value creation.

Because of this volatility, hedge strategies are often employed against a drop in price and, given the broad spectrum of geology and resources involved, the strategy can vary greatly from well to well.

Having a reliable process and technology to manage natural gas, crude, condensate and NGL products across the distribution chain is therefore critical to success for anyone com-mitted to participating in the evolving shale boom. The ability to capture, view and value physical and financial positions, as well as manage cost, margins and logistics workflow, in real-time, will separate the leaders from the laggards.

Over the past 30 years, Allegro Development has evolved to become the leading software and services provider of commodity intelligence solutions designed to optimize energy assets across the upstream, midstream and downstream landscape.

To learn more about Allegro and discuss your specific needs in moving on the upcoming shale revolution, visit www.allegrodev.com.

About Allegro

Allegro is a global leader in energy trading and risk management solutions for power and gas utilities, refiners, producers, traders and commodity consumers. With more than 29 years of deep industry expertise, Allegros enterprise platform drives profitability and efficiency across front, middle and back offices, while managing the complex logistics associated with physical commodities. Allegro provides customers with agile solutions to manage risk across natural gas, power, coal, crude oil, petroleum products, emissions and other commodity markets, allowing decision makers to hedge and execute with confidence. Headquartered in Dallas, Texas, Allegro has offices in Calgary, Houston, London, Singapore, Sydney and Zurich, along with a global network of partners.

For further information please contact Samantha Johnston at [email protected] or +1.214.237.8149.

or call us at +1.888.239.6850

North America +1.214.237.8000 Europe +44(0)20.7382.4310 Asia Pacific +65.6236.5730


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http://en.wikipedia.org/wiki/Shale_gas_in_the_ United_States

National Geographic2. , US to Overtake Saudi Arabia, Russia as Worlds Top Energy Producer, Thomas K. Grose, November 12, 2012 http://news.nationalgeographic.com/news/energy/2012/11/121112-iea-us-saudi-oil/

Harvard Belfer Center, The Shale Oil Boom: A US Phenomenon, Leonardo 3. Maugeri, June 2013 http://belfercenter.ksg.harvard.edu/files/The%20US%20Shale%20Oil%20Boom%20Web.pdf

Money Morning4. , The Shale Oil Boom is Going Global (Starting With This Huge Deal in Argentina), Dr. Kent Moors, August 13, 2013 http://moneymorning.com/2013/08/13/the-shale-oil-boom-is-going-global-start-ing-with-this-huge-deal-in-argentina/

Forbes5. , Promised Lands Fracking Fictions: OPEC Goes Hollywood with Crocudrama, Larry Bell, January 13, 2013 http://www.forbes.com/sites/larrybell/2013/01/13/promised-lands-fracking-fictions-opec-goes-hollywood-with-crocudrama/

LawyersandSettlements.com, From Gavel to Shackles: Celeb and Sierra Club 6. Protest Fracking, Jane Mundy, August 20, 2013 http://www.lawyersandsettlements.com/articles/hydraulic-fracturing-water-contamination-epa-fracking-hydrofracking/hydraulic-fracturing-water-contami-nation-7-19011.html

Bloomberg7. , Anti-Fracking Laws in New York Towns Upheld on Appeal, Chris Dolmetsch and David McLaughlin, May 2, 2013 http://www.bloomberg.com/news/2013-05-02/anti-fracking-laws-in-new-york-towns-upheld-on-appeal.html

GasDrillinginBalcombe, Blog at Wordpress.com, Europe against Fracking a 8. continent says: NO!, January 26, 2012 http://gasdrillinginbalcombe.wordpress.com/2012/01/26/europe-against-frack-ing-a-continent-says-no/

ExxonMobil, 2013 Outlook for Energy: A View to 2040 9. http://www.exxonmobil.com/energyoutlook


Oil & Gas IQ10. , Energy Access, Upward Income Mobility & Shale Production: A Causal Connection?, Nathan Randazzo, August 20, 2013 http://www.oilandgasiq.com/strategy-management-and-information/columns/upward-income-mobility-shale-production-a-causal-c/

VisionGain11. , The Shale Gas Market Report 2011-2021 http://www.visiongain.com/Report/605/The-Shale-Gas-Market-2011-2021

Saudi Gazette12. , Shale Gas Revolution Changes Geopolitics, Syed Rashid Husain 24 Feb 2013 http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20130224154337

Environmental and Energy Study Institute, Fact Sheet: Shale Gas and Oil Termi-13. nology Explained, Kate Glass, Dec 2011 http://files.eesi.org/fracking_products_120111.pdf

Wikipedia, Natural-gas processing 14. http://en.wikipedia.org/wiki/Natural_gas_processing

INGAA Foundation, Inc., North American Natural Gas Midstream Infrastructure 15. through 2035, June 28, 2011 http://www.ingaa.org/File.aspx?id=14911

US Energy Information Administration, Foreign investors play large role in US shale 16. industry, April 8, 2013 http://www.eia.gov/todayinenergy/detail.cfm?id=10711

Fuel Fix17. , US shale boom putting OPEC on the defense, Harry R. Weber, June 9, 2013 http://fuelfix.com/blog/2013/06/09/opec-on-the-defense-amid-us-shale-boom/

Drilling Contractor18. , Barnett Shale group challenges benzene emissions allegations, June 4, 2010 http://www.drillingcontractor.org/barnett-shale-group-challenges-benzene-emission-allegations-5958

OAonline19. , Permian Basin economic indicators remain robust, Donald Munsch, June 8, 2013 http://www.oaoa.com/news/business/article_3b356960-cfd0-11e2-a43f-0019bb30f31a.html

PBS Newshour20. , Comeback: Why the US Sits at the Brink of a New Boom, Charles Morris, June 19, 2013 http://www.pbs.org/newshour/businessdesk/2013/06/comeback-why-the-us-sits-at-th-1.html


Oil & Gas Financial Journal21. , The fight to limit Bakken shale flaring, Sandy Fielden, May 7, 2013 http://www.ogfj.com/articles/2013/05/the-fight-to-limit-bakken-shale-flaring-.html

Huffington Post22. , Marcellus Shale Gas Production Growing Rapidly, Having a Major Impact on National Energy, Kevin Begos, August 15, 2013 http://www.huffingtonpost.com/2013/08/15/marcellus-shale-gas-production_n_3759541.html

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The Shale Gas Revolution