Onshore Rush By Offshore

Moratorium

Dian L. Chu, July, 2010

Economic Forecasts & Opinions
 Deepwater Horizon
 Apr. 20, 2010 - Explosion at BP's
Deepwater Horizon oil rig in the Gulf of
Mexico

Graphic Source:Treehugger.com, & WSJ.com

©2010 Economic Forecasts & Opinions by Dian L. Chu

Oil Spill in the U.S. Gulf
 The largest oil
spill in U.S.
history
 Current
estimate -
12,000 to
19,000 barrels
leaking a day.

©2010 Economic Forecasts & Opinions by Dian L. Chu

Some Gulf Oil Facts
 Oil Production from the Gulf of Mexico
◦ 1.6 million barrels a day in 2009
◦ 30% of U.S. domestic production,
◦ 8% of the U.S. oil consumption
◦ 19% of total U.S. oil reserves
 Crude oil production loss resulting from
the moratorium - 31,000 bbl/d in Q4,
2010 and 82,000 bbl/d in 2011 (EIA
estimates, July 2010)
Source: U.S. EIA, June & July 2020

©2010 Economic Forecasts & Opinions by Dian L. Chu

 Offshore Drilling Moratorium
 A six-month halt on new permits in has idled 33
exploratory wells & rigs
 Expect a global tightening of offshore drilling related
regulations

Graphic Source: NY Times, Mar. 31, 2010

©2010 Economic Forecasts & Opinions by Dian L. Chu
Moratorium’s Deep Impact
 Oil Services - Small to mid-size U.S. Gulf-centric
co’s.
 Including but not limited to
◦ Drillers – e.g. , Noble, Diamond Offshore and Ensco
◦ Transportation – such as Hornbeck and PHI, Inc.
 Rig Exodus - Two deepwater rigs already left the
Gulf for new long-term contracts
 Large offshore services co’s to redeploy
resources outside of U. S.
 Smaller offshore players have no choice but to
stay and fight the moratorium for survival

©2010 Economic Forecasts & Opinions by Dian L. Chu

Onshore Rush - North America
 North America onshore remains the
closest region to the Gulf with high profit
potential to quickly redeploy capital and
personnel
 Oil companies are jumping onshore
North America to make up for the
reserve and production shortfall due to
the moratorium

©2010 Economic Forecasts & Opinions by Dian L. Chu

 Onshore Rush - Europe & Canada
 Bigger producers most likely will also
shift focus to international gas shale
plays (East Europe) & Canadian oil
sand

Graphic Source: Petroleum Economist, Dec. 2009

©2010 Economic Forecasts & Opinions by Dian L. Chu
 Domestic Shale Gas
 Drill or lose lease, producers’ hedging, and
favorable joint ventures will most likely ensure a
high shale gas activity level at least till 2012

Graphic Source: U.S. EIA

©2010 Economic Forecasts & Opinions by Dian L. Chu
 Rising Activity in Oil Shales
 Hot Now – U.S. oil and liquid rich shale
plays, due to favorable commodity pricing

Graphic Source: geology.com

©2010 Economic Forecasts & Opinions by Dian L. Chu
 Peak Oil This!
 Total world resources of oil
shale - 411 gig tons to yield
2.8 to 3.3 trillion barrels of
shale oil (2005 est.)
 The United States, Russia
and Brazil account for 86%
of the world's shale oil
resources
 United States accounts 62%
of world shale oil resources

Source: Wikipedia & newenergyandfuel.com

©2010 Economic Forecasts & Opinions by Dian L. Chu

 Shale Oil - Economical Now
 Shale oil became
economic in 2001
with the
advancements in
horizontal drilling
and completion
technology
 Process similar to
Canadian oil sand -
$35 -$54 crude for
a 15% return

Source: Fact Sheet: U.S. Oil Shale Economics, Fossil.energy.gov

©2010 Economic Forecasts & Opinions by Dian L. Chu
 The Prolific Bakken Shale Formation
 The largest continuous
petroleum system in the
U.S. Lower 48 states ever
assessed by USGS as of
2008.
 Most of the Bakken play is
in the Williston Basin,
across North Dakota,
Montana, South Dakota,
Manitoba and Saskatchewan.
 The basin covers roughly
300,000 square miles.
Source: geology.com & Powerlineblog.com
©2010 Economic Forecasts & Opinions by Dian L. Chu
 Bakken Reserves Estimate
 USGS estimated mean undiscovered
volumes of 3.65 billion barrels of oil in the
Bakken Shale Formation
 The area of Bakken oil shale formation in the
Williston Basin is estimated to hold as much
as 400 billion barrels of oil.
 Various studies, including the USGS and the
state of North Dakota, put the recoverable
reserves raging from 2.1 billion to 4.3
billion barrels.
Source: USGS,Wikipedia
©2010 Economic Forecasts & Opinions by Dian L. Chu
Three Forks Formation
 The recoverable oil in the
Three Forks formation--
under the Bakken
Formation– is estimated
at up to 2 billion barrels
of oil within North
Dakota alone.
 (Based on the North
Dakota Geological Survey
and Department of Mineral
Resources report issued on
Apr. 29, 2010. )

©2010 Economic Forecasts & Opinions by Dian L. Chu

 Good For The Goose ….
 Many gas-focused
producers are shifting
towards oil to balance
asset portfolio
 New technologies for
shale gas are as
effective in shale oil
 Increasingly, high spec
rigs from
unconventional gas
plays are moving to
shale oil plays, such as
Bakken
Source: RigZone.com and WSJ.com
©2010 Economic Forecasts & Opinions by Dian L. Chu
 A White Hot Bakken
 One of the hottest plays
in the nation
 Record lease sale
activity
 Rig count in North
Dakota more than
doubled since mid-2009
driven mostly by the
Bakken play
 Shortages of skilled and
service labor, housing
and hotel room driving
up costs

Source: RigZone.com, & The bismark tribune

©2010 Economic Forecasts & Opinions by Dian L. Chu
 Some Active Players at Bakken
 E&P’s
◦ EOG Resources, Whiting Oil and Gas,
Continental Resources
 Drillers
◦ Nabors, Precision Drilling, Helmerich & Payne,
Inc.
◦ Ensign Energy Services, Patterson UTI.
Pioneer Drilling
 Drilling & Completion Services – Schlumberger,
Complete Production, Core Lab
Source: RigZone.com
©2010 Economic Forecasts & Opinions by Dian L. Chu
Stable Commodity Prices Favor
Services Sector
 In a stable commodity
price environment,
service companies tend
to have higher returns
on capital than other
energy sub-sectors.
 Futures curve suggest
we could be heading
towards that scenario..

©2010 Economic Forecasts & Opinions by Dian L. Chu

Moratorium Tipping the Scale
 Offshore services providers traditionally
enjoy higher margins than land services
companies
 Oil spill and moratorium has tipped the
scale favoring the onshore service sector
in the short to medium term
 Providing an entry point for long term
investment in the offshore services sector

©2010 Economic Forecasts & Opinions by Dian L. Chu

 Chart’s Tale – Favoring Onshore
 Onshore services co’s performing better than the offshore
counterparts
 In addition to offshore, Halliburton (HAL) also enjoys dominant
market share positions in quite a few onshore oil service categories
 HAL shares appear oversold due to its association with Deepwater
Horizon rig

Graphic Source: Reuters, June 24, 2010

©2010 Economic Forecasts & Opinions by Dian L. Chu
American Shale Oil Forecast
 The U.S. EIA’s latest Annual Energy Outlook in
2010 forecast oil shale production to become
more significant as world oil prices increase.

©2010 Economic Forecasts & Opinions by Dian L. Chu

 The Next Energy Game Changer?
 U.S. shale gas has shifted the world energy
landscape by weakening the long stronghold of
Gazprom and Russia on natural gas.
 Shale oil in America could be the next game
changer in the energy geopolitical balance.

Graphic Source: Powerlineblog.com

©2010 Economic Forecasts & Opinions by Dian L. Chu
Onshore Rush By Offshore
Moratorium

Dian L. Chu, July, 2010

Economic Forecasts & Opinions