North American Shale Gas Revolution

Presentation to APEC By Dan Cowan – Petroleum Resources Branch, Natural Resources Canada May 10, 2011 Canada’s Natural Resources – Now and for the Future 1

Outline

        Natural gas and energy in Canada Energy policy and jurisdiction North American gas market Shale gas at a glance How has “the game” changed?

Cdn. unconventional resources Challenge of commercializing resource Canadian supply forecast Canada’s Natural Resources – Now and for the Future 2

Energy important to Canada’s economic prosperity

 3 rd largest producer & exporter of natural gas

25%

 Only OECD country with growing oil production

20% Energy as a Percentage of Canadian Total (2009) 20.6% 23.4%

 Stable and secure energy supplier

15%

 $84 billion exports in 2009, primarily oil and gas:  23.4% of total exports

10% 5%

 In 2009, energy represented 6.7% of GDP, with direct employment of about 263,000 people

0% Investment Exports 6.7% GDP 1.8% Employment

Canada’s Natural Resources – Now and for the Future 3

Federal Energy Framework and Jurisdiction

  Reliance on competitive markets for determining supply, demand, prices, and trade Shared jurisdiction over natural resources

Provincial Jurisdiction

•Resource ownership, management and royalties •Land-use planning and allocation •Laws regarding the exploration, development, conservation and use of natural resources within provincial boundaries Canada’s Natural Resources – Now and for the Future

Federal Jurisdiction

•International and interprovincial issues •North, offshore and Crown lands •Works declared to be for the general benefit of Canada (e.g. science and technology) •Nuclear, uranium 4

North American Natural Gas Market

     74 Bcf/d - fully integrated market  Supply and demand centers connected via extensive pipeline network Canada is a major producer and net exporter  Provides 85% of US imports Majority of reserves located in Western Canada  Far from premium markets incl. Boston and H.H.

Surging U.S. shale gas production  Prices expected to remain relatively low Ongoing efforts to build and diversify markets Canada’s Natural Resources – Now and for the Future 5

Technology is unlocking shale gas potential

 Shale is an unconventional natural gas  Resource development not previously economical due to low flow rates  Combining long-reach horizontal drilling with multi-stage hydraulic fracturing has made the resource viable Canada’s Natural Resources – Now and for the Future 6

Shale Gas - Production and Resource Profile

 Shale gas development began in the US where production grew from <1 bcf/d in 2000 to about 15 Bcf/d today  More than 20% of North American production  Shale gas widely expected to compose a third of North American natural gas production by 2020  Canadian Society for Unconventional Gas estimates 700 to 1300 Tcf of natural gas in Canada (largely unconventional)  At unconstrained prices, North America estimated to now have 100-200 years of supply Canada’s Natural Resources – Now and for the Future 7

How is shale gas changing the game?

     

2000-2007

Supply-limited market High drilling levels, concern about supply High prod’n costs, high and volatile prices, linked to oil Falling WCSB conventional prod’n Falling exports to US Canada looking to import LNG Canada’s Natural Resources – Now and for the Future      

2008- Present

Demand-driven market, lower drilling, 100-200 years supply Lower prod’n costs and prices, reduced volatility Decoupling from oil prices Redrawing the energy map Surplus LNG import capacity Industry advancing LNG

export

projects 8

Forecast Oil (WTI) and Natural Gas (Henry Hub) Prices

$160 $140 $120 $100 $80 $60 $40 $20 WTI H.H.

$0 20 00 20 05 20 10 20 15 20 20 20 25 Oil Price Range Natural Gas Price Range Average Price

Source: Various private consultants on retainer to the department and publically available forecasts.

Natural Gas prices converted into per barrel equivalent using a value of 1 barrel oil = 5.8 MMBtu Canada’s Natural Resources – Now and for the Future

$27 $24 $9 $6 $3 $0 $21 $18 $15 $12

9

Major Unconventional Gas Basins

  Canada has major unconventional gas resources 50% of currently defined potential exists within Horn River and Montney  Both among lowest cost basins in North America  Challenged by distance to domestic markets and current low prices Canada’s Natural Resources – Now and for the Future 10

   

Producer Challenge: How to increase netbacks?

Cost reductions, stimulate demand etc. Focus on the liquids rich plays Exploring gas-to-liquids opportunities

Diversify export markets (via LNG) LNG >$11.00

Oil-based LNG AECO $3.84

H.H.

$4.11

NBP $8.99

Canada’s Natural Resources – Now and for the Future 11

Canadian Gas Supply Forecast – February 2011

Shale Gas Tight Gas

Canada’s Natural Resources – Now and for the Future Source: CAPP, Price assumption: $5.50/mcf 12

Conclusions

 Surging US unconventional natural gas prod’n caused significant over-supply in North America  Canada has enormous shale gas potential  Industry aggressively developing shales in BC and other provinces  Industry exploring new business models including boosting demand, gas-to-liquids technology, and diversifying export markets via LNG.

Canada’s Natural Resources – Now and for the Future 13