icfi.com |

2015 Summer Meeting and Conference of the Freight Systems and Marine Committees Transportation Research Board

National Academy of Sciences Building

2101 Constitution Avenue

Washington, DC

Harry Vidas, ICF International

June 25, 2015

Domestic Energy Flows:

Oil and Gas Drilling Activity &

Production Trends with Associated

Transportation Needs

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• Overview of ICF

• Oil Market History and Outlook

• Natural Gas Market Expectations

• Rig Utilization Trends

• Historical and Forecast Well Counts

• Typical Well Construction and Materials Needs

• Transport Needs for Well D&C and Production

• Expected Future Trends and Implications

Outline of Presentation

3 icfi.com | ©Copyright ICF International, All Rights Reserved

Environmental Assessments

Regulatory Analysis

•Energy Efficiency

•Sustainability

•Smart Grid

•Demand Response

•Distributed Gen

•Transmission

•Distribution

•Integrated Resource Planning

•Coal

•Nuclear

•Natural Gas

•Renewables

•Natural Gas

•Natural Gas Liquids

•Petroleum

•Petrochemicals

•Adv Biofuels

Natural

Resources Generation

DSM Transmission

& Distribution

Diverse Consultancy with Domain Expertise in Energy Markets

Industry-best modeling and analytical capabilities

• Global presence—70+ offices;

headquartered in the Washington, DC

area

• More than 5,000 employees

• 2014 revenue of $1.05 Billion

• World-class domain expertise across

the energy, environment,

transportation, and health care sectors

• Diverse client base—US federal, state,

and local agencies, utilities,

commercial clients. Lead US EPA air

regulatory adviser since 1975

• One of America’s Best Small

Companies, Forbes 2005-2011

• Best Global Environmental

Consultancy in 5 of 6 categories,

Environmental Finance Magazine

• One of the largest energy efficiency

consultancy/implementation firms in

North America

• Leader in Customer Care/Engagement

ICF CORPORATE OVERVIEW

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Evolution of D&C Technologies and Practices

■ Horizontal drilling and steering

■ Multi-stage hydraulic fracturing

■ Fracturing fluids and techniques

■ Seismic and other geophysical analyses of drilling locations

■ Reductions in environmental impacts (multi-well pads, water conservation and recycling, reformulation of additives, RECs, etc.)

NATURAL GAS OVERVIEW

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Shale Resources Dominate North American Supply

10

NATURAL GAS OVERVIEW

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• Natural gas prices are expected to recover from the current low levels.

– Higher than historical demand from the power sector observed in the first several

months of 2015 is expected to continue.

– Drilling activity has declined across all major producing basins and slower

production growth is expected in the coming months.

– Storage inventory is below the five-year annual average level due to cold weather in

February and March; storage injection will replenish inventories over the next

several months.

• In the long run, gas prices will continue to strengthen as demand grows.

– Large volumes of LNG exports are still expected to come on-line, despite lower oil

prices leading to weaker economics for projects in earlier stages of development.

– Incremental petrochemical gas use still expected, but ethylene production and LPG

exports (and thus, gas use associated with those activities) are not likely to be as

robust in a lower oil price environment.

– U.S. exports to Mexico will continue to increase, as projected demand growth from

power plants will continue to outpace Mexico’s domestic production.

– Power sector demand growth driven mostly by coal plant retirements in response to

environmental regulations.

North America Natural Gas Market Outlook – Price Trends

Section 1, Page 6

NATURAL GAS OVERVIEW

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ICF’s Natural Gas Price Projection

• Increased demand

growth will push gas

prices above $5 per

MMBtu by 2020.

• Long-term prices are

expected to range

between $5 and $6.50

per MMBtu. – Prices are high enough to

foster sufficient supply

development to meet

growing demand, but not

so high to throttle the

demand growth.

– Accelerated price growth

after 2030 reflects power

generation demand

growth for nuclear

capacity replacement and

natural gas reserves’

depletion effects.

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

2005 2010 2015 2020 2025 2030 2035

20

14

$/M

MB

tu

Annual Average Henry Hub Price

Historical ICF Projected

Perfect Storm Leads to

Unsustainably Low Gas

Prices

Demand Surge &

LNG Exports

Ramp Up

Stable Prices – Market

Growth and Supply

Growth in Lockstep

Nuclear Retirements

Supply Rationalization

Cold Winter Pops 2014 Gas Price

Section 1, Page 7

NATURAL GAS OVERVIEW

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• Gas production from oil wells is likely to moderate in response to lower oil

prices, as producers realign their portfolio to more productive plays. – The Marcellus and Utica shale plays will continue to be the primary sources of new

production.

– Canadian production growth will come entirely from shale and unconventional resource

development.

• Gas-focused midstream infrastructure development still robust, as

infrastructure is needed to accommodate growing gas production and

support market growth. – Development focuses on linking Marcellus/Utica supplies to regions with market growth.

– Natural gas flow patterns change significantly as Marcellus/Utica shale becomes the biggest

supply source for the North American natural gas market.

• Relatively weak seasonal price spreads are expected, consistent with

recent history, but price volatility is likely to increase as demand

strengthens. – Price volatility is expected to remain high in certain markets, especially during winter.

North America Natural Gas Market Outlook – Production

and Infrastructure

NATURAL GAS OVERVIEW

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Projected North American Gas Supply

• Total gas production

increases by 1.8% per

year, primarily from shale

resource development that

grows by 3.8% annually.

– After 2020, shale gas

production accounts for

roughly two-thirds of all

U.S. and Canada gas

production.

• Other unconventional gas

production remains fairly

constant:

– Tight gas increases

modestly while CBM

declines.

• Conventional production

continues to decline by

3.3% annually.

• Offshore production

exhibits modest increases.

U.S. and Canadian Gas Production (Tcf per year)

Conventional Onshore

Coalbed Methane

Tight Offshore

Shale

0

5

10

15

20

25

30

35

40

45

50

2010 2015 2020 2025 2030 2035

NATURAL GAS OVERVIEW

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Domestic Gas Demand is Less than Supply

Other

Residential

Commercial

Industrial

Power

LNG Exports

Mexican Exports

0

20

40

60

80

100

120

140

2010 2015 2020 2025 2030 2035

U.S. and Canada Gas Demand, Average Bcfd

Natural gas demand growth

is driven by growth in export

markets (LNG and Mexican

exports), in the next five

years.

The power sector is the

largest single source of

incremental domestic gas

consumption in the long-

term.

– Between 2015 and 2020,

growth is primarily driven

by natural gas capacity

replacing coal.

– Accelerated growth is

expected after 2020 when

federal carbon regulation

is initiated.

– After 2030, nuclear

retirements start a new

round of growth.

NATURAL GAS OVERVIEW

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Exports Will Make up the Difference

• Since 2012, DOE has approved

non-FTA exports for 7 U.S. LNG

terminals: Sabine Pass, Freeport,

Lake Charles, Cove Point,

Cameron LNG, Jordan Cove, and

Oregon LNG. – ICF’s current projection assumes

U.S. LNG exports reach 9.1 Bcfd by

2024.

– LNG exports from British Columbia

are delayed by 2 years relative to

ICF’s Q1 2015 projection, and

projected to reach 2.1 Bcfd by 2025,

due to reduced oil prices.

• Recent growth in Mexican exports

have been driven by increases in

Eagle Ford production and growth

in Mexican gas use.

– Mexican gas demand is being driven

by replacement of oil-fired

generation.

0

2

4

6

8

2010 2015 2020 2025 2030 2035

US Exports to Mexico (Average Bcfd)

California West Texas/New Mexico Arizona South Texas

US Gulf Coast

US East Coast

British Columbia

0

2

4

6

8

10

12

14

2010 2015 2020 2025 2030 2035

LNG Exports (Average Bcfd)

NATURAL GAS OVERVIEW

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Changes in Pipeline Flows Over the Next Decade

• Robust Marcellus gas production growth displaces flows from the Gulf Coast such that many Gulf Coast to Northeast pipelines will reverse flow by 2017.

• Marcellus gas will reach Eastern Canada through Michigan and New York.

• Declining conventional production in Alberta and increasing gas consumption for oil sands development and LNG exports from British Columbia reduce eastward flows from Western Canada.

Source: ICF International

Section 1, Page 12

NATURAL GAS OVERVIEW

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Oil Market Trends

Production grew

(especially US tight oil) as

global demand slowed

Saudi Arabia responded by

defending its market share

driving prices down

ICF expects slow recovery

in oil prices to $75/bbl,

similar to futures market

trajectory while EIA see

higher long-term oil prices

Debt burdened E&P’s face

liquidity concerns and are

responding with reductions

in capital expenditures

PETROLEUM OVERVIEW

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Drivers for Future Oil Price Trends

Long term Expected Value

Duration of Low Prices

Oil Price Bottom Prices will recover when:

• Economic growth returns to Asia, Europe, strengthens in U.S.

• Oil production increases where the cost of marginal wells sets

the long-term price

Current conditions affecting near term prices:

• Anemic economic growth in China/Asia and Europe

• OPEC not cutting back on production

• US and Canada production remains strong/Massive U.S. stock overhang

• U.S. dollar value increase

Low prices will continue if:

• Economic weakness continues

• N.A. oil production maintains present levels or grows

• Iran re-enters the market

• Limitations on physical inventory storage persist

PETROLEUM OVERVIEW

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Crude Oil and Condensate Production Forecasts

PETROLEUM OVERVIEW

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Crude Oil Flow Trends

PETROLEUM OVERVIEW

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Increasing Horizontal Drilling

Source: Baker Hughes Note: Weekly drilling counts through 6/2015.

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US Oil and Gas Completions and Footage

• Approximately 45,000

new US oil and gas

completions per year

• About two-thirds in 2013

were oil wells

• Total footage has

increased to about 375

million feet due to

growing number of

horizontal wells

Source: API Quarterly Completion Report

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US Well Completions &

Footage – Horizontal and

Vertical

• In 2012, about

16,000 out of

45,000 completed

oil and gas wells

were horizontal

• Total drilled footage

is almost 3X the

year 2000 level

• Most current

footage is from

horizontal wells

Source: IPAA Producing Oil and Gas Industry in Your State

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ICF U.S. Well Completion Forecast

• ICF expects

recent fall off in

well counts to

continue unless

oil price rebound

significantly.

• Future wells to

be horizontal

wells with high

productivity,

bolstered by

continued

technological

advances. Excludes dry holes and some minor well categories

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Well Site Development Requires Significant

Materials and Equipment Supplies

• Drilling and

completing a

horizontal gas well

costs from $3-$8

million.

• First step is site

development: road

construction, pad

construction, mud &

wastewater pit and

construction, and rig

mobilization

• A typical drill pad

now accommodates

2 to 8 wells

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The Drilling Stage Requires a Large Number of

Personnel, Materials and Services and Onsite Equipment

Equipment and services

required to drill include:

• Rig rental

• Rental of other tools

• Water

• Fuel supply sources (e.g.,

diesel fuel)

• Materials transport to and

from site

• Food and lodging for drill

site personnel

• Tubular goods

• Cement

• Wellhead equipment

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Well Construction Involves Several Layers of Steel Casing

and Cement

• A typical shale well has between 3-5 layers of

casing, with cement between each layer to seal

the well

• An average shale gas well requires 22,000 feet

of steel casing, 8,000 feet of well tubing, and a

quarter-mile of gathering lines per well

• Recent size of US OCTG market about 7

million tons per year.

• Market for cement for US oil and gas drilling is

about 3.3 million tons per year.

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Large Volumes of Sand and Water Required for Hydraulic

Fracturing

• An well in the Marcellus shale might

requires 5 million pounds of sand

• Recent size of US proppant market

(brown sand, white sand, ceramics, etc.)

about 50 million tons per year.

• The “frack” fluid includes roughly 95%-

97% water, 3%-5% sand “proppants,”

and 0.5%-1% chemicals.

• A typical horizontal shale gas well needs

3-9 million gallons of water for hydraulic

fracturing.

Source:

http://www.northcountrypublicradio.org/news/story/20432/20120906/to

wns-prep-for-heavy-fracking-truck-traffic

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Transport Needs for Drilling and Completion of

Horizontal Wells • Approximately

1,200 to 2,200 round trip truck trips required for each HZ shale gas or tight oil well.

• About half of these are for fracture supply water.

• Fracture flowback disposal water also significant.

• Significantly fewer trips per well with pad drilling.

• Materials such as proppants and OCTG transported to region by rail and brought to well site by truck.

Analysis of Number of Round Trips per Completed Shale WellBoulder County, Colorado - 2013

Single Well - Four well Pad -

Round pad average

Activity trips totals per well

Construction Pad and road construction 87 90 23

Drilling Drilling rig 93 90 23

Drilling fluid and materials 68 270 68

Drilling equipment (casing, pipe, etc.) 113 450 113

Completion Completion rig 42 40 10

Completion fluid and materials 43 170 43

Completion equip.(pipe, wellhead, etc.) 10 10 3

Fracturing equipment (pump trucks, tanks, etc.) 317 320 80

Fracture water 1,038 4,200 1,050

Fracture sand 48 190 48

Flowback water disposal 350 1,400 350

Total 2,209 7,230 1,808

Source: "Boulder County Oil and Gas Roadway Impact Study," prepared for Boulder County, CO, January, 2013

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Transportation Needs Related to Producing Wells

• Crude and condensate transport from well (truck and pipeline): currently about 9.6

million barrels per day

• Natural gas transport from well (pipeline): currently about 92 bcfd wet raw gas from

wellhead and 72 bcfd dry marketed gas.

• Water transport from well (truck and pipeline): estimated at roughly 35 million of

barrels per day

• Water transport to wells for waterfloods and steamfloods (pipeline and truck – mostly

recycle produced water)

• CO2 transport to well for CO2 floods: roughly 2 bcfd of “new carbon” dioxide delivered

to well sites – not counting recycled gases.

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Future Trends Influencing Transportation Needs

• Near-term concerns are overwhelmingly cost reductions and improved

efficiencies

• More horizontal wells with pad drilling

• Increased lateral length

• Denser frack spacing along laterals

• More proppant per stage

• Re-fracks of existing wells

• More use of onsite natural gas instead of diesel for rigs and pumpers

• Environmental rules affecting well designs, water recycling, water

transport by pipeline, water disposal, etc.

• Substituting gases (N2, CO2, propane) for water as frack fluid

• Changing regional mix of production and imports/exports that affect

midstream transportation networks

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Contact Information

Harry Vidas Vice President Harry.Vidas@icfi.com

(703) 218-2745

Bob Hugman Senior Consultant Robert.Hugman@icfi.com

(703) 218-2737