2014 RICE GLOBAL E&C ANNUAL FORUM

www.forum.rice.edu

Perspectives on the Impact of Shale Gas and Tight Oil Production on the Global

E&C Industry …and Vice Versa

September 23, 2014

Today’s objectives

•ReviewtheimpactofU.S.shalegasandtightoilontheglobalenergymarkets

•ExaminetheroleofE&Conthefutureevolutionoftheenergymarkets

•HighlightsomeofthechallengesandimplicationsforenergyplayersandE&Cserviceproviders

U.S. natural gas market has experienced a “supply shock” driven by shale gas

• ShalegasisnowtheleadingsourceofNGintheU.S.

• U.S.NGpriceshavedecoupledfromoilpriceproducingwidelydivergentglobalgaspricesbyregion

• LowerNGpriceshaveledtodomesticsubstitutionandopenedupinternationalarbitrageopportunities

0

20

40

60

80

100%

2000 2013

Shalegas

Conventional

Tightgas

CBM

Imports

U.S.naturalgassupplybytype(BCF/D)

4%

1%

-2%

30%

-4%

'00-'13CAGR

Source:EIAAEP2014

As a result of wet gas production, NGL volumes have surged

• LowerNGLpriceshavesignificantlybolsteredU.S.competitivenessandusheredinaU.S.petrochemicalsmanufacturingrenaissance

- Doublingofethanecrackingcapacity

- QuadruplingofLPGexports

- Doublingofdomesticmethanolproduction

- Resurgenceofdomesticammoniaproduction

Source: WellsFargoSecurities;EIA;ICFInternational;BainAnalysis

NGProcessing

Refinery

outputs

6%CAGR

A “supply shock” is also underway in U.S. tight oil and crude sources are changing rapidly

0

20

40

60

80

100%

2010 2013

Imports

Tightoil

Offshore

Otheronshore

U.S.crudesupplybytype(MBD)

AlaskaCO2EOR

0%

-6%

62%

-6%-4%0%

'10-'13CAGR

• Tightoilisfastestgrowingsourceofcrudeoilsupply

• U.S.priceindex(WTI)decoupledfromotherworldindices

• Lower-pricedU.S.tightoildisplacinglightimports

• U.S.hasbecomeanetexporterofrefinedproducts

Source:EIAAEO2014;DeutscheBank;Bentek;WoodMackenzie;CAPP;CalgaryHerald

0

100

200

$300B

U.S.Oil&GasExplorationandDevelopmentCapEx

2007

99

2008

116

2009

86

2010

114

2011

149

2012

184

2013

190

2014

198

2015

202

2016

OnshoreConv

Offshore

Tightoil

Shalegas

209

-4.1%

-8.2%

8.1%

4.6%

CAGR('13-'16)

2007-201311%CAGR

2013-20163%CAGR

Total U.S. oil & gas exploration and development capital expenditures beginning to slow

Source:BasedonRystad,July2014

Midstream companies are investing at historically high levels to capitalize on supply shifts

• Supermajors havehistoricallyhadhigherCapExlevelsgivenendof“easyoil”andneedtodevelophighercostreserves(e.g.,deepwater,oilsands,Arctic)

•MidstreamMaintenanceCycle(2004-2007)relativelylowlevelsofCAPEXdrivenprimarilybymaintenanceprojects

•MidstreamInfrastructureSupercycle seeingdramaticincreaseinCAPEXdrivenbymajorexpansionprojects

Source:Companyannualreportsandinvestorpresentations;Bainanalysis

U.S. chemical industry planning increased CapEx as a result of shale gas-induced competitiveness

0

5

10

15

$20B

U.S.energy-relatedchemicalsCapEx

2013

6

2014F

8

2015F

13

2016F

16 43%

CAGR('13-'16)

Source:IHS,“America’sNewEnergyFuture:TheUnconventionalOilandGasRevolutionandtheU.S.Economy”

As a result of surge in CapEx, E&C revenues are up even as backlog continues to grow

…ANDSUPPORTEDBYHEALTHYANDGROWINGBACKLOG(ALSOUP50%VS.2009)

E&CREVENUESININDUSTRIAL/PETROLEUMSEG.AREONTHERISE(UP50%VS.2009)…

*Oil&gas-relatedincludesupstream,midstream,downstreamandpetrochemicalsNote:CBIbacklogin2013scaled50%Engineering,ConstructionandMaintenance,75%Fabrication,100%technology,basedonrevenueallocationsfromanalystreports;assumesJECbacklog2008-2010is35%O&G-related,givenO&G-relatedshareofbacklogin2011

Source:ENR;CreditSuisse,2014Engineering&ConstructionOutlookandvariousanalystreports;Bainanalysis

10%CAGR

Audience Response Question

Giventhenumberofcapitalprojectsbeingbuiltandplannedacrosstheentireoilandgasvaluechain,

doestheindustryhavetheengineeringandconstructioncapacitytorespondtotheseplans?

Yes

No

Notsure

Survey of ECC Plenary session attendees

Giventhenumberofcapitalprojectsbeingbuiltandplannedacrosstheentireoilandgasvaluechain,

doestheindustryhavetheengineeringandconstructioncapacitytorespondtotheseplans?

Yes

No

Notsure

22%

66%

12%

Source:SurveyofECCPlenarysessionattendees,Sep2014,N=800+

Think about the following question

Whataretheconsequencesofnotdeliveringthesemajorprojects(roughly)ontimeandonbudget?

Source:SurveyofECCPlenarysessionattendees,Sep2014,N=800+

Long-term forecasts vary widely

FORECASTSVARYONIFANDWHENOILPRODUCTIONWILLPEAK

Actual

OPEC

IEA

IHSCERA

EIA(’14basecase)

EIA(’14highcase)

EIA(’14lowcase)

Forecastrange

ALLFORECASTSEXPECTGASPRODUCTIONTOINCREASE

Forecastrange

Actual

Bentek

IEA

IHSCERA

EIA(’14basecase)

EIA(’14highcase)

EIA(’14lowcase)

RaymondJames

2010

2015

2020

2025

2030

0

20

40

60

80

100

110

2010

2015

2020

2025

2030

U.S.drynaturalgasproduction(BCFD)

Note:EIAhighandlowcasesbasedonthehighandlowresourcescenarios;Crudeoilproductionfiguresincludeleasecondensatebutexcludenaturalgasliquids;drynaturalgasproductionfiguresexcludenaturalgasliquids;IHSCERAforecastexcludespotentialimpactofAlaskaLNGexportsandassumesinfrastructureconstraintsdon’tholdbackproduction;IEAcrudeoilestimatesbasedonexcludingEIANGLproductionforecastfromIEAU.S.totalliquidsproductionforecastSource:EIA2014AEO;IEA2013WEO;OPEC10/13article;IHSCERA;Bentek;RaymondJames

Nearly all variability in these forecasts is driven by shale gas and tight oil

SHALEGASDRIVES~85%OFEIAFORECASTDIFFERENCEIN2030

TIGHTOILDRIVES~90%OFEIA FORECASTDIFFERENCEIN2030

0.0

20.0

40.0

60.0

80.0

100.0

120.0

USnaturalgasproduction(BCFD)

2030EIALow

79.4

DifferenceLowtoHigh

31.3

-3.7

2030EIAHigh

Shalegas

Tightgas

Assoc

Nonassoc

CBM

107.0 Alaska

Tightoil

Shalegas

Source:EIA2014AEO,HighandLowO&Gresourcecases

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

NGL prices have decoupled from oil but still support attractive well economics

0

2

4

$6/MCF

Drygas

3.80

Wetgas

Methane

Naturalgasoline

Isobutane

Normalbutane

Propane

Ethane

5.87

Wetgaseconomics(forward12-monthstrip)

Historically,NGLpricescloselyfollowedoil

Since~2010,NGLpriceshaveseparatedfromoil

Source:Bloomberg;EIA;EnterpriseProductsPartners,L.P.;EPDFundamentalsandNYMEX,asofSeptember2013

NGLPRICESDECOUPLEDFROMOILIN~2010NGL PRICESSTILLSUPPORTMOREATTRACTIVEWELLECONOMICS

10

20

50

$100

0.1 0.2 0.5 1 2 5 10 20 50 100

2011

2010

R²=0.87Slope=86%

Cumulativeproductionfromshalegasplays(BOE)

Totalcostofshalegasproduction(perBOE)

2030

2025

2020

2015

20142013

2012

2009

20082007

2006

2005

Both shale oil and shale gas production are following steep learning curves (industry experience curves)

10

20

50

100

200

500

$1,000

0.001

0.002

0.010.02

0.050.1 0.2 0.5 1 2 5 10

2012

2011

R²=0.75

Slope=87%

Cumulativeproductionfromtightoilplays(BOE)

0.005

Totalcostoftightoilproduction(perBOE)

2013

2010

2009

2008

2007

20062005

TIGHTOILINDUSTRYEXPERIENCECURVE

SHALEGASINDUSTRYEXPERIENCECURVE

Note:EstimatedbasedonRystad forecastsofunconventionalshaleoilandshalegasproductionandexpendituresSource:Rystad;Bainanalysis

Low and high cases for U.S. shale gas production result in structurally different NG supply curves

NAgasproductionandU.Sdemand(BCF/day)

50 100 150 2000

6

8

10

0

U.S.Demand=~70BCF/D

Associated

Shalegas

CANnon-assoc

U.S.non-assoc

Coalbedmethane

4

2

12

Imports

Costofproduction/import($/MMBtu)

2030LowShaleGasProductionScenario

Tightgas

NAgasproductionandU.Sdemand(BCF/day)

50 100 150 2000

6

8

10

0

Associated

4

2

12

Costofproduction/import($/MMBtu)

U.S.Demand=~95BCF/D

Shalegas

Availableforexport

2030HighShaleGasProductionScenario

Source:EIA;IEA;Bainanalysis

Global proposed LNG capacity additions have rated costs from $4 to $14 pre MMBtu

~56BCF/D

~43BCF/D

Note:SupplycurvefromDeutscheBank,estimatesforincrementaldemandthrough2025takenfromMacquarieResearch;ME=MiddleEast,AB=Alberta;PB= PapuaBarat(Tangguh LNGinIndonesia).1BCF/D=7.82MTPA

Source:WoodMackenziedata;DeutscheBank;MacquarieResearch;Bainanalysis

UNDERCONSTRUCTION;INENGINEERING;

PLANNED/APPROVED

Increased LNG exports from the U.S. could significantly flatten out the supply curve

~56BCF/D

PLANNED&SPECULATIVE

Note:1BCF/D=7.82MTPASource:WoodMackenziedata;DeutscheBank;MacquarieResearch;Bainanalysis

Substantial uncertainty exists around how much LNG the U.S. will ultimately export

FERC HASAPPROVEDLESSTHAN15%OFPROPOSEDLNG EXPORTCAPACITY

0

10

20

30

40

50

FERC&DOEApproved

5.7

DOEApproved

12.2

Otherproposed

23.0

TotalPotential

40.9

U.S.lower48LNGproposedexportcapacity(BCFD)

SOURCESOFUNCERTAINTY

• GlobalLNGdemand

- Demandgrowthestimatesnearlydoubletotaldemandby2025…

- …thesedemandprojectionsareedgingupwards

• CompetitiveLNGsupplies

- 50+LNGfacilitiesbeingbuiltorplanned;manywithratedlowerlandedcostvs.U.S.

- Highvariabilityofon-time,-budgetthreatenscompetitivenessofmanyoftheseprojects

• Globalshaleboom

- Basedonreservesalone,shalehasthepotentialtotransformtheenergymarketsinmanycountries

- Everymajornon-NorthAmericanshaleresourceholderhassignificantbarrierstoovercome(geology,infrastructure,regulation)

- Wedonotexpecta“globalshalerevolution”innext~10years

Note:Onlyliquefactionfacilitiesareconsidered,approvedfacilitieshavebeengrantedconditional/finalapprovalbyU.S.DOEbutnotnecessarilybyFERCSources:BP,BG,DepartmentofEnergy,Bloomberg,Platts

Low and high cases for U.S. tight oil production result in structurally different crude oil supply curves

Source:EIA;IEA;Bainanalysis

2030LowTightOilProductionScenario 2030HighTightOilProductionScenario

4 8 12 160

Costofproduction/import($/BBL)

EOR

Arctic

Imports

CANhvy

Tightoil

Deepwtr

Conventional

Dom.hvy

NAcrudeproductionandimportsintotheU.S.(MBD)

U.S.Demand=~12MBD

0

100

20

40

60

80

120

U.S.Demand=~13.5MBD

4 8 12 160

Costofproduction/import($/BBL)

EOR

CANhvy

Deepwtr

Conventional

Dom.hvy

NAcrudeproductionandimportsintotheU.S.(MBD)

Tightoil

0

100

20

40

60

80

120

High U.S. tight oil production scenario could significantly alter global clearing price

Note:CrudedemandforecastdoesnotincludecondensatesandliquidsSource:Rystad;IEA;AdvancedResourcesInt’l;BPEnergyOutlook2030;Bainanalysis

-2

-1

0

1

2

3

4MBD

-2

-1

0

1

2

3

4MBD

3.4

1.7

3.4

0.7

2.6

0.7

0.3

-0.8-0.5

-1.4

3% 1% 1% -1% -2%Changeindemand(%)

-57% -42% -27% -31% -69%Changeinprice(%)

7% 6% 4% 0% -1%Changeinproduction(%)

Historically, over-supply situations have led to price declines between 30% and 70%

1986 1991 1998 2001 2008

Changeinproduction

Changeinconsumption

Source:EIA;IEA

Strategy in an environment of high uncertainty requires a scenario-based approach

Unprecedentedlevelofuncertainty

Developandadjustplans

Quantifyrisksanddevelop

mitigationstrategies

BuildIntegrated

view

Define/updatescenarios

WINWHICHEVERSCENARIO

MATERILIZES

• Competitionbetweenmuchmorediverseenergysources

• SpeedofexpansionofshalegasandtightoilinsideandoutsideofNA

• Speedandcostofinfrastructurebuildout

• Changeindomesticandinternationalflows

• Speedanddegreeofdemandsubstitution

Defineandtrackleading

indicators