Shale Oil:

Impacts On Our Industry

2014/2015 Epic Class

Basic Definitions
Fracking
Process of injecting liquid at high pressure into subterranean rocks,
boreholes, etc., so as to force open existing fissures & extract oil or
gas.

Shale Oil / Tight Oil

Also called oil bearing shale which is oil locked in rock. Most
commonly found in shale or siltstone Limestone a mile below the
earths surface. Horizontal Drilling & Hydraulic Fracturing are the
two basic methods of extracting the oil.

Oil Shale
Organic rich, fine grain sedimentary rock that contains solid
organic compound know as Kerogen. This product is mined like
coal and is heated to temperatures up to 950 degrees F. 2

North American Crude

Significant Production Increase

Oil Sands
Growth
Shale Oil

Source: Oil & Gas Journal, http://www.ogj.com/articles/print/vol-110/issue-12/processing/us-refining-outloo

North American Crude

Production Growth Driven by Shale Oil

Production has grown to over 3M bpd

4

Fracking Has a Long History

In North America

Source: GAO

Hydraulic Fracturing Overview

The marriage of fracking with horizontal drilling helped
the boom in shale oil development

Shale Oil Global Resources

Shale Oil reserves found throughout the world
Growth in production primarily in North America

Shale Oil Fields In North America

Source: US Energy Information Administratio

7 Key Shale Producing Regions

Since 2007 Shale Oil production from these regions

responsible for:
95% of domestic oil production growth
100% of the domestic natural gas production growth

Shale Oil & Gas

Production Volumes
Initial Shale exploration & development focused on gas production
Low natural gas prices in NA drove development of liquids rich fields
from ~2007+
Associated gas production from oil producing wells helps maintain gas
production growth
Key Oil Regions include: Bakken, Eagle Ford, & Permian
Oil Production
Natural Gas Production

Source: EIA February 2015 Drilling Productivity Report , http://www.eia.gov/petroleum/d

NA Forecasted Crude Oil Production

US Tight / Shale Oil production is predicted to peak in ~2020
Production relatively constant after 2020, contributing significant oil
volumes

Peak
Shale Oil
Productio
n

Source: Oil & Gas Journal, http://www.ogj.com/articles/print/vol-110/issue-12/processing/us-refining-outlo

Developing Shale Oil Plays

Wolfcamp/Cline
West Texas, eastern shelf of Permian Basin
Estimated recovery of 30 billion barrels of oil

Monterey
California Coastal and Peninsular regions
Downgraded to <1 billion barrels recoverable oil vs 2011 estimate of 15.4 billion
barrels

South Central Oklahoma Oil Province (SCOOP)

Oklahoma, southern region of Woodfords Cana play
Springer shale gaining traction
Estimates of 8 billion barrels of recoverable oil

Tuscaloosa Marine
Stretches between southeastern Mississippi and Louisiana
Estimated recovery of 7 billion barrels of recoverable oil

Utica
Northeast Ohio, parts of Pennsylvania and New York, lies below Marcellus shale
Estimated to hold up to 5.5 billion barrels of recoverable oil

Niobrara
Northeast Colorado, parts of Kansas, Wyoming, and Nebraska
70,000 square miles

Estimated 2 billion barrels of recoverable oil

US Crude Oil Production by Type

Shale oil has resulted in production growth of light sweet crude in
North America
Shale oils are characterized by low resid yields & low sulfur content

Light sweet crudes tend to produce resids with poor quality

Product
ion
Growth

Source: EIA website: http://www.eia.gov/todayinenergy/detail.cf

A Universe of Crudes:
Resid Yields
Eagle Ford & Bakken crudes contain little resid

Shale Oil = 2-3%

How do these compare to other crudes?

Canadian Heavy = 30%+

Medium Sour = 15-18%
WTI = 10-15%

API Gravity

Typical US refinery = 31.1 deg

Shale Oil = 40+ deg

US Imports of Crude Oil by Type

US shale oil light sweet crude production has displaced
equivalent foreign imports
Essentially no light sweet/sour crude imported to US since early
2014
Other types of crude oil imports remain relatively consistent
US Energy Policy bans the export of most crudes

Source: U.S. Energy Information Administration,

Oil Movements In North America & Globally

Significantly Changed by Shale Oil

Increase in bbls PADD 2 to 3 /

Decrease in bbls PADD 3 to 2
Midwest - imports of Canadian backing out Gulf Coast bbls
Gulf Coast Shale bbls backing out import bbls; down 2.3MBD
since 2010
Net receipts for PADD 3 were positive in 4Q 14 - first time in 30

The Shale Oil Boom

What Weve Learned So Far
Shale oil development has driven large growth in
North American crude oil production
New production is light sweet crude
This has displaced historic imports of similar
crude grades
This has changed the way crude goes to market

Shale Oil Transportation

Rail Congestion
Lack of Infrastructure

Path of least resistance to market

Pipelines = at capacity or not in place
Rail & truck = primary means to market today

Rail Traffic congestion/constraints

2008 - Class I Railroads originate 9,500 car loads of crude oil

2014 - Class I Railroads originate in excess of 450,000 rail
cars.
11% all domestic production now moved by rail.
2009 = 20k bbls/day
2014 = 1.1M bbls/day
Increased cost in traditional rail movements
Congestion on many lines & yards
Source: Association of American Railroads D

Shale Oil Transportation

Increased Rail Costs & Safety Concerns
Rail Car Supply/Demand

Costs = Peaked in 14 at $2450/mo

Backlog for tank cars = 51,582 cars (3Q 14)
Current production rate = 35,000 cars /year
Recent Headlines:
Fires Finally
Dwindling, Days
After Illinois Oil
Train Derailment

Spate of
Derailments
Deepens Fear of Oil
Train Disaster

Safety

New tank car design requirements

Approx 228,000 cars are DOT-111 tank cars of which 100,000
are used to transport crude.
Regulations on speed, structure, routes, etc. Source: Reuters 2/2/15; Jarrett Re

Refining & Asphalt Production

US Refining Industry - Evolved to maximize gasoline production

Based on crude slates expected to be heavier & more sour

Large investments - Coking, Conversion, & Technology - Facilitate fuels production / meet
new fuel standards

Changes in crude feed stocks = Impact on utilization of assets

Refineries handle a wide range of crudesonly have flexibility within a fairly narrow range

Industry challenged - Asphalt yields changing with daily crude selection

Imports have helped balance the shift in crude slates

Logistically advantaged refiners (ie. easy access to shale oil)

Could be incentivized to open conversion capacity = resid production goes down

New lease on life for some Refineries

Smaller/older = Some may now be able to run shale oil vs. costly upgrades for heavy/sour
diets

Coastal = May now (recent past) be able to compete with domestic crude; instead of
Brent

2 Quality

Shale Oil
Summary of Impacts
Logistics
Better crude pipeline & rail logistics will continue to improve
Lead times driven up / Costs driven up / Regulations are increasing

Transforming the industry

The global movement of oil is changing
Policy & politics could affect future oil industry practices

Domestic Refiners
Refiners will have increasingly greater optionality for crude barrels
Refining economics & logistics will dictate:

Crude selection
Asphalt availability
Grades produced
Asphalt production vs. alternative values
All still sorting itself out

Shale Oil
Recent Impacts of Lower Crude Prices
OPEC driving down oil pricing to protect market share
U.S. rig count down 49% in since October
EIAs estimated daily production of crude = 9.3 M bpd
Down from 9.42 M bpd

The EIA projects output will fall in 3Q for the first time in 4
years
Lease rates for rail cars down 45% from peak ($1300/mo.
in Jan)
In November 2014 EIA estimated a total of 502,000 bpd of
2 crude/condensate were exported

Source: U.S. Energy Information Admin

The future?...
Continued Change is
Certain!
2

EPIC Class of 2014-2015

Jeremy Alexander
Jim Barlow

David Dishman
Scott House
Matt Kennedy

John Barrington
Drew Brooks
John Brownie

Lee Schloss
Vince Tallant
Tyler Youvan

Todd Davis
Seth Hankowski (Dean)