Unconventional/Tight Gas Development Challenges and Pricing Issues

PIP - Pakistan Energy Conference 2011 April 10 12, 2011

Serena Hotel, Islamabad

Moin Raza Khan Dr. Fareed Siddiqui Saqib Ahmed

General Manager Exploration Senior Manager Reservoir Engineering Chief Accountant

TALK OUTLINE

Global Energy Overview Energy Resources Overview - Pakistan Unconventional Reservoirs? Resource Potential

Unconventional Reservoirs - Development Challenges Pricing Issues vis--vis Risk, Uncertainty and Cost of Exploration and Development Conclusions and Recommendations

Global Energy Overview

World Energy Overview

We are faced with difficult challenge of sustaining the E&P growth in line with worlds growing demand of Energy World is producing ~30 Bbo of Oil and ~105 Tcf of Gas per year o o Demand expected to growing at ~1.2% per year Only about half of produced reserves being replaced by Exploration

Most giants/super giants are aging Most Production by NOCs (Saudi Arabia, Kuwait, Iran, Iraq, Libya, Mexico, Venezuela & Russia etc) Most petroleum provinces have attained maturity More Effort => Little Reserves Most recent big discoveries in Deep water offshore, not enough to catch up Efforts are underway to go unconventional towards exploration & production
Source: Exxon Mobil Corporation 2009 Summary Annual Report

Future prediction By year 2030

By year 2030 total demand to be about 100 million barrels oil per day The global energy mix will look very similar Resources are adequate to support global demand growth. Access along with Technology are important in all aspects of our energy challenges Still considered the safest resource, viz recent nuclear disaster in Japan
350 300 250 200 150 100 50

MMboed

Source: Exxon Mobil Corporation 2009 Summary Annual Report

Energy Resources Overview - Pakistan

Countrys Exploration & Production

Hydrocarbon Potential vs. Exploration
Total Sedimentary Area = Area under Exploration Reserves Oil (Billion barrels) Gas (Trillion Cu. ft.) = 827,268 Sq. km. 279,618 Sq. km. (34%) Discovered 1 54 776 238 1,048
Drilling Density and Success Rate
12 10 10 30% 40% 30% 20% 2

8
6 4 2 0

Prognosticated 40 200

10%

10% 0%

Wells Drilled: Exploratory (Success Ratio: 1:3.3) Discoveries Development and Appraisal

Pakistan Drilling Density

World Success Rate

Crude Oil Reserves January 2011

306 mmbbl

Average 22 wells per 10,000 Sq. Km. against world average of 100 wells
659 mmbbl

Oil and Gas Reserves / Production:

Product Gas Oil Reserves 27.59 Tcf 306 MMBBL

Production 4,208 mmcfd 68,298 bpd

R/P Ratio 18.9 12.9

Cumulative Production

Balance Recoverable

Natural Gas Reserves January 2011

26.40 Tcf 27.60 Tcf

PPLs share in Countrys Production:

Gas Oil /NGL/Condensate 24% 09%

Cumulative Production

Balance Recoverable

Oil & Gas Creaming Curve of Pakistan

Number of Discoveries increases while the size decreases with time..

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0 1 2 3 4 5 6 7 8
1.0 0.9 6.8 0.8 0.6 0.4
0.3

2.9

5.0

0.4

2.3

Original Reserves (MMBOE)

10,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

0.6

2.1

0 1900

0.6

1910

0.3

0.5

0.8

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

1920

Discovered

1930

Total Production

Dhulian

1940 1950

Balkassar Joyamir Mari Uch Sui

Years

1960 1970 1980 1990 2000 2010

Adhi, Dhodak Pirkoh Dakhni

Meyal Adhi Dhodak Pindori Chanda Makori Manzalai Loti Dhurnal Mazari, Fimkassar Tando Alam Khaskheli

Qadirpur Kandra Kadanwari Mari deep

Zamzama, Bhit, Sawan, Miano Manzalai, Makori

Pakistan - Future Energy Demand Supply Deficit

137.6 (demand)

Coal lmports

88.5 (supply)

Nuclear Local Coal

33.5 (local)

Projected natural gas demand at 4.5% GDP growth

(2.5 bcfd)

(8 bcfd)

Projected indigenous gas supply

(Source: Ministry of Petroleum)

Source: PIP Energy Outlook April 2011

Pakistan E&P Current Situation

Increasing gap between countrys produced and discovered reserves

Decreasing size of new discoveries

Limited availability of the seismic & drilling services Increasing uncertainties and risks in exploration process Limited availability of experienced Human Resource Limited potential for large discoveries in currently accessible onshore areas of Pakistan

Decreasing expected return (reserve addition) against increasing exploration risk

Unconventional Reservoirs (UCR)? Resource Potential

Why go for unconventional reservoirs......

"Future energy resources of the World, particularly gas, will be found in what we consider today to be unconventional reservoirs. These are not, in fact, undiscovered resources, since their occurrences are fairly well-known. However, we do not have adequate geologic data to evaluate the contribution such reservoirs will make to the Worlds energy endowment in the future.

(USGS)

Resource Triangle

Unconventional Hydrocarbon Resources

Unconventional resources are

o o

Difficult to develop with available technology Expensive to produce

Unconventional hydrocarbon resources include

o o o o o o

Tight Gas (TG) Sand Reservoirs (in situ permeability of less than 0.1 mD and porosity about 10%) Shale gas Coal bed Methane Deep gas Methane hydrates Tar sands and Oil Permeable Ss Tight gas reservoir play shales
Basin-centered Gas Pervasive prolific source rock

Region World

Coalbed Methane (Tcf) 9,051

Shale Gas (Tcf) 16,112

Tight Sand Gas (Tcf) 7,406

Total (Tcf) 32,560

Unconventional Gas Production (USA)

US Total Gas Production

Projection shows Unconventional Reservoirs will be the dominant resource for Future

Comparison of unconventional gas production in 1996 and 2006

Total Unconventional Gas in Pakistan

Total Known Tight Gas: ~34 Tcf Prognosticated Shale Gas in-place Reserves : 65 Tcf

Preliminary Analysis A Shale Gas assessment study is underway

Unconventional Reservoirs (UCR) Development Challenges

Drilling and Completion Challenges

Drilling Fit-for-purpose Rigs, portable, fast moving, multiple workstrings with minimal footprint Requires industrialized drilling environment in the country Managed pressure-drilling with adaptive fluids Horizontal or Multilateral Wells Geo-Steering Completions Massive Hydraulic Fracturing 5-10 Fracs per well High Strength Proppants High Quality Less Damaging Frac Fluids Smart Completions e.g. Downhole Gauges etc Produced Water Disposal Challenges

Reservoir Management Challenges

In-place and Reserves Estimation - Difficult to Estimate Specialized Logging, Reservoir Engineering Concepts Modification required for low rate production, low permeability reservoirs Sharp Decline in Well Productivity ~70% decline in the first year Long Production Tail Reserves highly sensitive to price because of high Capex/Opex Limited per well Drainage Area Per well recovery limited to well drainage area 10-20 acre well spacing as compared to 160 acre for Conventional reservoirs

How to Initiate UCR Projects

Operator Identify and analyze TGR development project Define pilot project Submit development concept to authorities E&P Service Contractor Offer latest technologies and equipment, Experienced people, Discount for TGR campaign Government authorities Provide incentives to the industry for TGR developments

Specialized Development Strategies From Technical Success to Commercial Success

Evaluate and Plan Develop Resource Maps Core and Core analysis

Logging and Testing Exploration/Exploitation Plan

Pilot Select Pilot Area Pilot well Confirm Drilling and Completion Strategy Optimize More than one Pilot may be required for different sections of the same Resource Develop Modular Development Approach Similar to Mining Approach

Conventional vs Modular Approach

Pricing Issues vis--vis Risk, Uncertainty and Cost of Exploration and Development

Tight Gas Price on the Card!

TG Policy

The tight gas policy announced by GoP in 2010 provides the stepping stone for Pakistans unconventional gas industry. The policy provides 40% - 50% premium over the 2009 Policy Price.
40% premium (USD / mmbtu) PP '09 (Z III) PP '09 (Z II) PP '09 (Z I) 6.13 6.59 7.04 50% premium (USD / mmbtu) 6.57 7.06 7.55

Compared to price of imported petroleum products of around US$ 13 /mmtbu *

* Source: Pakistan Energy Yearbook 2010

Is TG Policy Price Sustainable?

While the development of TG resources is highly capital intensive, and thus the provision of higher prices, volatility in the following variables may make some good prospects uneconomical to exploit.

International Crude Price Inflation and Exchange Parity Heating value of gas vs Gas Composition Gas in place volumetrics Cost of Services Capital Expenditure

Economic Scenario

Input Assumptions Gas Initially In Place Recovery / Shrinkage BTU Factor TG Price for Zone Well productivity No. of wells Production cycle

Normal BTU Case 750 BCF 59% / 85% 920 II 5 MMscfd 25 20 year

Medium BTU Case 750 BCF 59% / 85% 850 II 5 MMscfd 25 20 year

Opex / boe
Capex Escalation Discount Factor

$3.5
$421m 3.5% 14%

$3.5
$511m 3.5% 14%

Results of Economics

(1 of 3)

NPV Sensitivities at Different Crude Prices (14% DF )

180

Base Case - Medium BTU (920) Normal BTU (920)

Low BTU Case (850) Medium BTU (850)

130

NPV at 14% DF Million US$

82.46
80

82.46

42.99
30

58.9 62.84 14.55 -4.59 14.55

-20

20

40

60

80

100

120

140

-24.2
-70

-8.5

Oil Price (US $/Barrel)

Results of Economics

(2of 3)

IRR Sensitivities at Different Crude Prices

Base Case - Medium BTU Value (920) Normal BTU (920) 25
20.5

Low BTU Case (850) Medium BTU (850)

22.43 22.43

Internal Rate of Return

20 15

18.49

20.1 15.2 13.62 15.2

11.98

10 5 0 0 20 40

13.29

Oil Price (US $/Barrel)

60

80

100

120

140

Results of Economics

(3 of 3)

NPV Sensitivities with variation in CAPEX & OPEX (@ Crude Price 75 $/bbl)
180.00

NPV at 14% DF (US$ Million)

Base Case - Medium BTU (920) Normal BTU (920)

Low BTU Case (850) Medium BTU (850)

130.00

80.00

62.84

41.49

30.39

30.00

-4.59
Base 10% 15%

-20.00

-24.7

-35.02

-70.00

CAPEX + OPEX Sensitivities

Zones to be redefined for Unconventionals

Zoning was introduced in 1994 policy to incentivize Companies to undertake exploration in difficult areas Foldbelts, Balochistan Basin, Offshore to Cater for Conventional Reservoirs Redefined in 2001 policy to demote Kirthar Foldbelt from Zone II to Zone III. In the changed scenario of high cost high risk for exploration and development for Unconventional reservoirs, Zoning needs to be redefined again to incentivize E&P sector to pursue this play type

Conclusions & Recommendations

Several studies suggest that only a small percentage of the huge hydrocarbon volumes that have been generated, reaches the Conventional Reservoirs Conventional reservoir size and chance of success of finding these is decreasing Significant hydrocarbon volume is present in Unconventional Reservoirs - Tight Sands and Organic Rich Shales V. Preliminary Assessment: ~ 100 Tcf Significant volume of Tight Gas is expected in Middle Indus Basin Hydrocarbon Production from Unconventional Reservoirs will eventually take over,

Three pronged approach required: i) Incentivize E&P Sector (Early Cot Recovery, optimum gas price etc; ii) Promote Service Sector; and iii) Gain Buyers confidence
Additional Incentive for low BTU gas; Redefinition of Zones inevitable A separate policy Shale Gas is also inevitably required

Main Drivers : "Technology" and Gas Price"

Thanks & Questions?

Tight Gas Reservoir

Gas bearing sandstones and carbonates having in-situ permeability to gas of less than 1 mD

Many ultra tight gas reservoirs may have in-situ permeability down to 0.001 mD
Typically, un-stimulated gas flow rates in a well less than 1 mmscfd
USA: ~ 300 Tcf (Recoverable reserves) Pakistan: ~ 34 Tcf (Estimated recoverable resource)

Conventional sandstone reservoir

Tight gas sandstone

What are shale gas?

The term Shale Gas refers to unconventional, continuous-type, selfsourced resources contained in fine grained organic-rich, low permeability clay rich rocks Shale permeability restricted utilization of a rich resource in the past Horizontal drilling and Hydraulic fracturing resulted shale gas boom in recent years Shale gas accounts for major gas supply in North America Expected to rise more
USA: ~ 742 Tcf (Recoverable reserves) Pakistan: Not estimated, could be up to ~65 Tcf

Basinwise Undiscovered Potential Resource of Conventional HC in Pakistan

6 Onshore basins

Kohat-Potwar basin 5 Tcfe Punjab Platform 2 Tcfe Lower & Middle Indus basins 2 Tcfe Kirthar (fold belt) 3 Tcfe Sulaiman (fold belt) 24 Tcfe Balochistan basin 6 Tcfe

2 Offshore basins

Indus Offshore basin 5 tcfe Makran Offshore basin - n/a

Total Undiscovered: 47 Tcf equivalent

Basinwise Prognosticated Reserves of Shale Gas in Pakistan

Prognosticated Shale Gas in-place Reserves : 65 Tcf

Preliminary Analysis PPL-Eni undertaking a joint Shale Gas assessment study for Pakistan

Tight Gas Development Technologies

Hydraulic multi-fracture simulation Coil Tubing Under balance Drilling

Acid Stimulation Enhance Perforation

Unconventional Resource: Appraisal

Appraisal of TG Resources: Well planning requires:

A petrophysical model to take into account micro- and meso-scale heterogeneities. 1D (borehole). Should model pore geometry based on Petrography, Core hot shot analysis, Imbibation curves (Mercury injection curves) / CMR/NMR logs. Fracture network model based on the borehole images, in-situ stress field and 3D seismic derived lineaments. A rock physics model integrating the above and the Acoustic Impedance volume A 3D porosity cube reconstructed geostatistically on the basis of the above

Design borehole trajectories (horizontal & slant-holes) to

intersect the fractures and porosity patches at an optimum angle place additional wells where isolated porosity compartments exist due to stratigraphic heterogeneities or isolated fracture networks Be able to Geo-steer the boreholes in real-time in the case of surprise faults or stratigraphic barriers using the porosity cube (built geostatistically and updated with new information).

Development of Unconventional Resources: Drilling & Production Technology

Drilling for Unconventional Resources requires to leverage on

Fit-for-purpose Rigs, portable, fast moving, multiple workstrings with minimal footprint Managed pressure-drilling with adaptive fluids Requires industrialized drilling environment in the country

Production

Sand jet perforation followed by annular coiled tubing (CT) fracture stimulation => excellent

production results in targeted thin-sands

Completion: Fraccing with Microseismic Monitoring technology. Directional frac. Dewatering.