Permian Basin & Eagle Ford Shale from a

Global Perspective

Art Berman
Labyrinth Consulting Services, Inc.

Texas Energy Council 30th Annual Symposium

Dallas, Texas
May 10, 2018

Labyrinth Consulting Services, Inc. artberman.com Slide 1

 Permian Basin & Eagle Ford Shale from a Global Perspective: The Big Picture
• Energy underpins natural systems
Ø Most people think that the economy is based on money. Money is nothing but a call on
work-energy.
Ø Energy is the economy.
• There is nothing on earth like oil
Ø 1 barrel of oil = 5,700,000 BTU = 1,760 kWh: converted to work = 700kWh.
Ø 1 human = 0.6kWh/day of work 700/0.6 = 1167days: 4.5 YEARS OF HUMAN WORK.
• The world ran out of cheap oil 20 years ago
Ø Today’s WTI oil price $71.51 is 96% higher than the average constant dollar price from 1986-
2004 of $36.58.
Ø That underlies most of the economic problems of today’s world.
Ø The working class has figured out that their lives are much worse today than 2 decades ago
& that is why Donald Trump is President of the U.S.
Ø Few understand that American greatness lasted only 20 years after WWII & was a singular
event.
• Technology does not create energy
Ø It is a spigot that allows access to energy.
Ø Debt has made things seem affordable by selling our energy future forward
Ø This led to the miracle of tight oil & shale gas.
Ø People want to believe: a few tweaks by politicians and better technology will make
America great again.
• Climate change is real & resulted mainly from over-population.
• There are no easy solutions except conserving what we need for the future & learning to live
with less.
Labyrinth Consulting Services, Inc. artberman.com Slide 2
 Putting the Shale Revolution in Perspective
April 2018 WTI Price of $66.25 is 80% Higher Than Average 1986-2004
U.S. Incremental Ouput: The Major Cause For Low Oil Prices
of $37 in Constant March 2018 Dollars
66 Canada, Iraq, Iran Saudi Arabia and Russia Also Important Contributors

65
$170 1st Bubble 2nd Bubble
$160 1974-1985 2004-2014 64 Canada

Millions of Incremental Barrels of Crude Oil & Condensate Per Day

$150 63
CPI Adjusted WTI Prices (March 2018 Dollars Per Barrel)

$140
Debt-Fueled Economic 62
$130 Expansion & Rapid Growth U.S.
$120 in China & East Asia 61

$110 60
$100 Iraq
$86 Avg 59
$90 Depressed Prices
$80 1986-2003 58 Iran
$72 Avg $66.25
$70
1986-2004 57 Russia
$60 1974-1985 Over-Supply, Demand Destruction & Price Brazil
$50 Oil Shocks Deflation $51 Avg 56

--> Indonesia-Ecuador-Qatar-Gabon
$40 $37 Avg 55 Saudi Arabia
Massive E&P 2015-
$30 Libya
$24 Investment (North 2004-2014Massive 2017 Angola Kuwait
54
E&P Investment Over- Venezuela UAE
$20 Avg Mexico
(Shale, Deep Water, Supply Algeria
$10 53
Heavy Oil) & Price Nigeria
$0 Source: EIA, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc. Deflation Source: EIA & Labyrinth Consulting Services, Inc. Base
52
Jul-76

Jul-89

Jul-02

Jul-15
Dec-81

Dec-94

Dec-07
Jan-70

Jan-83

Jan-96

Jan-09
May-74

May-87

May-00

May-13
Aug-77

Aug-90

Aug-03

Aug-16
Jun-75

Jun-88

Jun-01

Jun-14
Nov-80

Nov-93

Nov-06
Oct-79

Oct-92

Oct-05
Apr-73

Apr-86

Apr-99

Apr-12
Mar-72

Mar-85

Mar-98

Mar-11
Feb-71

Sep-78

Feb-84

Sep-91

Feb-97

Sep-04

Feb-10

Sep-17

Nov-12

Nov-13

Nov-14

Nov-15

Nov-16
Mar-12

Mar-13

Mar-14

Mar-15

Mar-16
Sep-12

Sep-13

Sep-14

Sep-15

Sep-16
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16
May-12

May-13

May-14

May-15

May-16
• The 1st Bubble 1974-1980: oil shocks and price increase from $23 to $117/barrel led to
massive E&P investments, over-production, demand destruction & oil-price deflation until
1998.
• Second Bubble: 1999-2014: flat global output & growing Asian demand led to increasing oil
prices from $17 to $148/barrel by 2008.
• After the 2008 Financial Collapse, OPEC cut production then, declining OPEC spare capacity,
falling OECD inventories, & near-zero interest rates—led to the longest period of high oil
prices in history from 2011-2014.
• Over-investment resulted in a massive over-supply, much of it from the United States and
Canada. The 2nd bubble burst in 2014 and prices collapsed.

Labyrinth Consulting Services, Inc. artberman.com Slide 3

 Oil Prices & The Long-Term Debt Cycle
Avg WTI Since The Oil-Price Collapse Is 46% Higher Than WTI Avg 1986-2003 No Demand Destruction 2011-2014 When Avg Brent Price Was $112/Barrel
Debt Began Increasing after 1982 Oil Shock & Exceeded GDP By 1986 $125 4.5
$35 $33 Trillion Est. Total U.S. Debt in 2017, GDP $19 Trillion $120
Global demand growth increased 2011-2014 4.25
$120 $112 Brent Avg
$32.9
$115
from 0.9 to 1.2 mmb/d 2011-14 4

Oil Price Debt

U.S. Govennment + Consumer + Non-Financial Corporate Debt (Trillions)

$110 $110 3.75

3.5
$30 Dec 2018 $105
3.25
$100
Dollars $100
3
$95
2.75
$88 Avg Price $90 $90

CPI-Adjusted Brent Price (March 2018 $/barrel)

WTI Price in March 2018 Dollars Per Barrel
2.5
$25 Positive Demand

Annual Liquids Demand Growth (mmb/d)

$85
2.25
Oil Shocks
$80 $80 Growth 2

$70 Avg Price $75 (RHS) 1.75

19.4 $70 $70 1.5
$20
GDP $65 1.25
1.2 mmb/d
Debt Inflection $60 $60
47-Year Avg
1
0.75
Point 2003 $48
$55
$15 0.5
$47/barrel $50 $50
0.25

3.5
2.7
3.5
4.1

3.4
2.2
2.9
1.1

1.2

1.7
1.4
1.8
1.1
0.4
0.5
0.6
0.1
1.0
1.5
1.7
1.3
0.5
1.8
1.8
0.8
0.6
1.6
3.1
1.4
1.0
1.5

3.1
0.9
1.1
1.2
1.2
1.9
1.2
1.6
1.5
1950-2017 Avg Price $45
0
$40 $40

-0.8
-0.4

-1.3
-1.9
-1.5
-0.4

-0.2

-0.6
-1.0
$35 Avg Price -0.25
$10 $35
-0.5
$30 $30
$24 Avg Price Debt > GDP $25
-0.75
-1
After 1986 $20
Negative
Brent Price LHS
$20 -1.25
$5 Demand Growth
$15 (WTI before 1975) -1.5
$10 (RHS) -1.75
Debt Inflection Point 1982 $10
$5 -2
Source: IEA, EIA, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc.
$0
Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc.
$0 $0 -2.25

2018E
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

• Petroleum Age after WWII produced unprecedented economic growth.

• Oil shocks of 1974-1986 threatened to end that party.
• Demand destruction & oil production bubble resulted in 18 years of cheap energy.
• Debt re-started economic growth & debt-based growth of China challenged oil supply after 2004.
• Second oil shock made unconventional oil possible. Zero-interest rates led to 2nd oil bubble.
• Longest period of high oil prices in history.
• That bubble burst in 2014 and oil prices collapsed but without demand destruction.
• Now, we are near the end of long-term debt cycle but in denial that the economic basics have
fundamentally changed since the post-war era.
Labyrinth Consulting Services, Inc. artberman.com Slide 4
 Low Interest Rates Created A Capital Bubble For Tight Oil & The Permian Basin
Permian Rig Count Rises & Falls Based on Expectation of $55+ Prices
Interest rates increased >5% as oil prices increased 160% ($58 to $151)
From 2004 to 2008 10 $110

$105
$150 20%
$100
$140 WTI Price Weekly Rig Count
(Mar 18% 5 $95
$130 Change 12 Wk Avg $90
160% 2018 (LHS)
$120 Dollars) 16% $85
CPI-Adjusted WTI Price (Nov 2017 Dollars Per Barrel)

$80
0

Federal Funds Effective Interest Rate (Percent)

$110
14% $75
$100
$70

Weekly Rig Count Change

$90 12% $65

WTI Price ($/barrel)

-5
$60
$80 1st Gulf $55
War 10% $55
$70 End QE 3 $66.25
Nov 2014 -10
$50
$60 8% $45
2015-2017 Avg $40
$50
WTI Price $48.72 6% $35
$40 -15
WTI Price $30
$30 5% 4% (RHS)
Interest Rates Current Rate $25

$20 1.7% Change In Permian Tight Oil Rig Count Lags Price By About 12 Weeks Weeks $20
2% -20 $15
$10

1/10/14

4/10/14

7/10/14

1/10/15

4/10/15

7/10/15

1/10/16

4/10/16

7/10/16

1/10/17

4/10/17

7/10/17

1/10/18

4/10/18
Tight Oil Boom

10/10/14

10/10/15

10/10/16

10/10/17
$10
Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statistics, EIA & Labyrinth Consulting Services, Inc.
$0 0%
$5
Oct-73

Oct-78

Oct-83

Oct-88

Oct-93

Oct-98

Oct-03

Oct-08

Oct-13
Apr-71

Apr-76

Apr-81

Apr-86

Apr-91

Apr-96

Apr-01

Apr-06

Apr-11

Apr-16
Jul-72

Jul-77

Jul-82

Jul-87

Jul-92

Jul-97

Jul-02

Jul-07

Jul-12

Jul-17
Jan-70

Jan-75

Jan-80

Jan-85

Jan-90

Jan-95

Jan-00

Jan-05

Jan-10

Jan-15
-25 Source: Baker Hughes, EIA & Labyrinth Consulting Services, Inc. $0

• The oil-price collapse coincided with the end of QE 3 and the beginning of U.S. interest rate
increases.
• Continued low interest rates caused margin hunters to focus first on tight oil and then,
specifically on the Permian basin.
• $30 oil prices brought large capital flows to a select group of producers seen as winners.
• Tight oil and Permian rig counts have more than doubled since August 2016. Rig counts
increase with expectation of $55+ oil prices
• Increased rig count and fear of ongoing over-supply is a major drag on oil prices.
• OPEC production cuts have balanced oil markets since early 2017 & some are now
questioning the lower-for-longer paradigm that dominated the last 3 years.
Labyrinth Consulting Services, Inc. artberman.com Slide 5
 The False Premise that Tight Oil Plays Are the New Swing Producer
Tight Oil Drilling & Production React to Price Signal Like All Other Plays--Slowly
U.S. Oil Future is a Bet On a Single Play
Permian Basin is the Only Tight Oil Play Producing More Oil
5.2 Than at the April 2015 Peak Following the OIl-Price Collapse $70

5.0
$60

4.8 WTI (RHS)

Incremental* Production Since April 2015 (mmb/d)

$50
4.6

4.4 2010 - 2015

WTI Price ($/barrel)

$40
Production Max
Permian
4.2

$30
4.0

Bakken
3.8
$20
Bakken
3.6

Eagle Ford Eagle Ford $10

3.4
Niobrara Niobrara
Anadarko Anadarko
3.2
Source: EIA & Labyrinth Consulting Services, Inc. Base $0

Jul-15

Jul-16

Jul-17
Jan-15

Jan-16

Jan-17

Jan-18
May-15

May-16

May-17

May-18
Nov-15

Nov-16

Nov-17
Mar-15

Mar-16

Mar-17

Mar-18
Sep-15

Sep-16

Sep-17
• No factual support for widespread belief that there is a price war between OPEC & U.S. tight oil.
• OPEC/Saudi Arabia reacted pragmatically to price collapse & recovery.
• Prime directive not to repeat mistake of 1982-1986 production cuts.
• “Just-in-time production” is another baseless theory.
• Shale output reacts to price just like all plays—slowly & in long-period cycles.
• Idea that U.S. shale is the new swing producer of the world also has no basis.
• Being a swing producer means that there is sufficient spare capacity to turn on and off based on market
signals. Shale plays have no spare capacity (they are just-in-time).
• Even if DUCs provide some spare capacity, there is no decision-making process that governs 1000s of
independent producers.
Labyrinth Consulting Services, Inc. artberman.com Slide 6
 Shale Cost Reductions 90% Industry Bust, 10% Innovation and Efficiency
4-Fold Increase In O&G Well Drilling Producer Price Index From 2004-2014 OPEC+ Decisions & Actions Have Affected Nearly Every Price Point Since Oil
Because of Higher Cost of Unconventional Technology
500.0
40% Decrease After Oil Price Collapse but 7% Increase in 2017 $140 $115 Prices Collapsed in 2014
$107.26
$110
WTI has Increased $27 Since OPEC+ Production Cuts
$130 $105
450.0
$100
~40% $120
Decrease $95 NYMEX Futures
400.0
From $110 $90 Price
Oil & Gas Well Drilling Producer Price Index (1985 = 100)

4-Fold Increase Deflation $85

OPEC
in O&G PPI $100

NYMEX WTI Futures Prices ($/Barrel)

350.0 $80 Decision OPEC+ Cut
Because of Not To JMMC Mtg
+7% $75 $74.09
Unconventional
$90
$70
Support Jan 2018 $70.73
300.0 $66.14
Oil & Gas Prices

WTI Price ($/barrel)

$80 $65
Nov 2014 $61.43 $60/barrel
2004-2014 $60
250.0 $70 $54.45
$55 $51.60
$51.23 $55.14
$56.64 $60 $50
OPEC+ Cut
200.0 $45
Extended
$50 $40 $43.46 $43.32 $42.53 Nov 2017
Oil & Gas Well Drilling $35 $38.24 OPEC+ OPEC+ Cut
150.0
Cost Index (LHS) $40
$30 Cut Extended
WTI Oil Price Nov 2016 Jun 2017
$30 $25 $26.21
100.0 (RHS) $20
OPEC "Freeze"
$20 $15 Proposed
50.0 $10 Feb 2016
$10
$5
Source: U.S. Federal Reserve Bank, EIA & Labyrinth Consulting Services, Inc. Source: EIA, Quandl & Labyrinth Consulting Services, Inc.
0.0 $0 $0

Jun-14

Jun-15

Jun-16

Jun-17
Nov-14

Nov-15

Nov-16

Nov-17
Oct-14

Oct-15

Oct-16

Oct-17
Apr-15

Apr-16

Apr-17

Apr-18
Mar-15

Mar-16

Mar-17

Mar-18
Sep-14

Feb-15

Sep-15

Feb-16

Sep-16

Feb-17

Sep-17

Feb-18
Jul-14

Jul-15

Jul-16

Jul-17
Dec-14

Dec-15

Dec-16

Dec-17
Jan-15

Jan-16

Jan-17

Jan-18
May-15

May-16

May-17

May-18
Aug-14

Aug-15

Aug-16

Aug-17
Dec-85

Dec-90

Dec-95

Dec-00

Dec-05

Dec-10

Dec-15
Aug-87

Aug-92

Aug-97

Aug-02

Aug-07

Aug-12

Aug-17
Jun-88

Jun-93

Jun-98

Jun-03

Jun-08

Jun-13
Oct-86

Oct-91

Oct-96

Oct-01

Oct-06

Oct-11

Oct-16
Apr-89

Apr-94

Apr-99

Apr-04

Apr-09

Apr-14
Feb-90

Feb-95

Feb-00

Feb-05

Feb-10

Feb-15

• Lower costs of shale production widely attributed to technology and efficiency.

• Price deflation accounts for 90% of lower costs because of a depression in the oil industry; 10% is
because of technology & efficiency.
• That is over for now and prices increased 8% in 2017.
• Shale growth has more to do with outside capital supply than break-even prices.
• Investors need to believe that significantly higher prices are coming.
• “Buy low, sell high” not a sophisticated concept but was responsible for capital flow into tight oil
after price bottom in early 2016.
• Smart money has always believed in limits to oil supply.
• That will drive the next inflow of capital as markets understand the limits of tight oil supply.
Labyrinth Consulting Services, Inc. artberman.com Slide 7
 Two of the Largest Tight Oil Plays are in Texas: Eagle Ford & Permian
EIA Forecast for Permian Basin Tight Oil is to Recover to 1.3 mmb/d in
2022 & Then Decline to 1.2 mmb/d by 2050
1.6 1.49 mmb/d
2015
1.31 mmb/d
1.4
2022

PERMIAN
1.2 BASIN
PLAY
Crude Oil & Condensate Production (mmb/d)

0.8

Eagle Ford
0.6

0.4

0.2

0 Source: EIA & Labyrinth Consulting Services, Inc.

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
EIA Forecast for Permian Basin Tight Oil is to Peak at >3.5 mmb/d in 2044
& Then Decline to 3.4 mmb/d by 2050

• The Eagle Ford Shale play is expected to recover to

4
3.54 mmb/d
2044

3.5

Avalon-Bone Spring
1.3 mmb/d by 2022 & then decline to 1.2 mmb/d by
3
2050.
Crude Oil & Condensate Production (mmb/d)

2.5 Spraberry
• The Permian basin plays are anticipated to grow
2
from 2.2 mmb/d in 2018 to more than 3.5 mmb/d by
1.5 2044 & then decline to 3.4 mmb/d by 2050.
1
Wolfcamp

0.5

0 Source: EIA & Labyrinth Consulting Services, Inc.

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050

Labyrinth Consulting Services, Inc. artberman.com Slide 8

 Eagle Ford Shale Case History Provides a Different Perspective
Semi-Log Plot of Rate vs. Time
100,000

Log Log Plot Rate vs Time

100,000

10,000

Monthly Rate, bbls or Mscf

10,000

Rate, bbls or Mscf/month

1,000

EOG 2013
OIL GAS 1,000
Max 57,000 53,000
b 1.25 1.30
Di 20.00 12.00
Points = Actual Data
100
EUR 401,691 295,699 Line = Forecast
0 5 10 15 20 25 30 35 40 45 50 55 60 Oil = Green, Gas = Red
Months from First Production
Points = Actual Data
Line = Forecast 100
1 10 100
Oil = Green, Gas = Red
Time months

Semi-Log Plot of Rate vs. Time

100,000

Log Log Plot Rate vs Time

Houston 100,000

San Antonio
10,000

Monthly Rate, bbls or Mscf

10,000

Rate, bbls or Mscf/month

EAGLE FORD 1,000

SHALE PLAY Corpus Christi DVN 2014

OIL GAS 1,000
Max 30,000 70,000
b 0.475 0.45
Di 1.80 1.20
Points = Actual Data
100
EUR 370,863 1,100,892 Line = Forecast
0 5 10 15 20 25 30 35 40 45 50 55 60 Oil = Green, Gas = Red
Months from First Production
Points = Actual Data
Line = Forecast 100
1 10 100
Oil = Green, Gas = Red
Time months

• Top 6 Eagle Ford operators were evaluated: Chesapeake, ConocoPhillips, Devon, EOG, Marathon, &
Sanchez.
• Standard rate vs time decline-curve analysis was used to match production and determine EUR
(estimated ultimate recovery).
• EUR is decreasing because the play is over-drilled & wells are interfering.
• Better technology results in higher initial production rates but also higher decline rates.
• Technology does not create energy.

Labyrinth Consulting Services, Inc. artberman.com Slide 9

 Belief About Improving Well Performance & Falling Break-Even Prices Re-Examined
2014 Was The Best Year for Top 6 Producers in the Eagle Ford Shale
Popular Belief About Improving Well Performance & Falling Break-Even Prices
380 Must Be Re-Examined $54

$52.36
370
369 $51.36 $52

360 $50.40
Break-Even $50
350
Price (RHS)
EUR (1000S of Barrels of OIl Equivalent)

340 $48

Break-Even Price ($/boe_

330
$46
320 EUR (LHS)
320
310 314 $44

308 $43.71
300
$42

290

$40
280

270 $38
2013 2014 2015 2016
Source: Drilling Info & Labyrinth Consulting Services, Inc.

• 2014 Was The Best Year for Top 6 Producers in the Eagle Ford Shale both in terms of EUR (estimated
ultimate recovery) and break-even oil prices.
• EIA Annual Energy Outlook 2018 released in late March corroborates this.
• Popular belief about improving well performance & falling break-even prices must be re-examined.

Labyrinth Consulting Services, Inc. artberman.com Slide 10

 2017 Well Performance Appears Even Worse Than 2016
EOG 2016 & 2017 Wells Eagle Ford Wells Have Steeper Decline Rate Than Wells From Previous Conoco Phillips 2017 Eagle Ford Wells Have Steeper Decline Rate Than Wells From Previous
Years Despite Higher Initial Production Levels Years Despite Higher Initial Production Levels
40,000
25,000

35,000

20,000
30,000
Monthlly Oil Production (barrels)

Monthly Oil Production (barrels)

25,000

15,000

20,000

15,000 10,000
2017

10,000

5,000
2017
5,000 2015 2015
2014 2014 2013
2016
0
2013 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Months of Production Months of Production
Source: Drilling Info & Labyrinth Consulting Services, Inc. Source: Drilling Info & Labyrinth Consulting Services, Inc.

Sanchez Energy 2016 & 2017 Eagle Ford Wells Have Steeper Decline Rates
Than Wells From Previous Years
9,000

8,000

7,000

6,000
Monthly Oil Production (barrels)

5,000

4,000

3,000

2,000

2017
1,000 2015 2014
2013
2016
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Months of Production
Source: Drilling Info & Labyrinth Consulting Services, Inc.

Labyrinth Consulting Services, Inc. artberman.com Slide 11

 Reconciling Study EUR Observations With Operator Claims

• This study shows that Eagle Ford wells for top operators average 300 kboe but many operators claim
EURs that are considerably higher.
• Part of the disparity is explained by BOE conversion factors: a barrel of NGLs is counted the same as
a barrel of oil even though its energy content and value are less than half of a barrel of crude oil.
• A 6:1 natural gas to boe conversion accurately reflects energy content but 14:1 better expresses
value including NGLs.
• Sanchez shows how it arrives at 877 boe for an average Comanche Area well.
• Using the value-based approach, the average Sanchez Comanche well is 572 boe--a difference of
35%.
• 877 boe also represents a “3-Stream EUR” consisting of multiple zone completion in upper & lower
Eagle Ford & Austin Chalk. This is somewhat misleading and represents “possible” not proven
reserves.
• It is unclear how representative “Comanche Area 3” is of Sanchez’s average wells.
Labyrinth Consulting Services, Inc. artberman.com Slide 12
 Proved Reserves vs Production Forecasts Do Not Agree
EIA Eagle Ford Production & Forecast (AEO 2018)
Exceeds Proved Reserves by 12 Billion Barrels of Oil
3.8x Reserve Growth Improbable & Not Seen in any Known Analogue Fields
1.6 17

15.95 billion barrels 16

1.4 15

14

Production

Reserves ( billions of barrels) & WTI in 2017 Dollars x 10

13
1.2
& Forecast 12
(LHS) 11
1

Production (mmb/d)
10
WTI in 2017 $ 9
0.8 x 10 (RHS) 2025
Production in Excess 8

58% of of Proved Reserves 11.78 bbo 7

0.6
Price (RHS) 6
Increase
5
0.4 4.16 billion barrels
4

3
Proved Reserves 4.16 bbo
0.2
(RHS) 2

0 0

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Source: EIA & Labyrinth Consulting Services, Inc.

• EIA estimates of Eagle Ford proved reserves have been been quite stable for several years at
about 4 billion barrels.
• Converting EIA’s production forecast indicates that proved reserves will be reached by 2025.
• Another 12 billion barrels will subsequently be produced at modestly increasing forecasted oil
prices.
• This combined with the well performance study suggests that Eagle Ford production growth is
unlikely and that reserves should be exhausted at current production rates in ~7 years.

Labyrinth Consulting Services, Inc. artberman.com Slide 13

 Proved Reserves vs Production Forecasts Do Not Agree
EIA Permian Production & Forecast (AEO 2018)
36 Billion Barrel Reserve Growth > Total U.S. Proved Reserves of 35 billion barrels
8.2x Reserve Growth Improbable & Not Seen in any Known Analogue Fields
4 43
42
41
40.45 billion barrels 40
39
3.5 38
37
Production 36
35
& Forecast 34

Reserves ( billions of barrels) & WTI in 2017 Dollars x 10

33
3 32
(LHS) 31
30
29
28
2.5 27
26

Production (mmb/d)
25
24
23
2 22
21
20
Production in Excess 19
18
1.5 of Proved Reserves 35.59 bbo 17
16
WTI in 2017 $ (RHS) 15
14
x 10 (RHS) 13
12
1 11
10
2022 9
8
50% of Price 7
0.5 4.96 billion Increase 6
5
barrels Proved Reserves 4.96 bbo 4
3
2
(RHS) 1
0 0

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Source: EIA & Labyrinth Consulting Services, Inc.

• EIA estimates of Permian proved reserves have grown but latest forecast is ~5 billion barrels.
• Converting EIA’s production forecast indicates that proved reserves will be reached by 2022.
• Another 36 billion barrels will subsequently be produced at modestly increasing forecasted oil
prices.
• This suggests that while Permian production growth is likely, reserves will be exhausted in ~4
years.

Labyrinth Consulting Services, Inc. artberman.com Slide 14

 Permian Proved Reserves Are Greater than EIA 2016 Estimate

• SEC 10-K filings for the largest Permian producers were used to compile company estimates of
2017 proved reserves.
• Results were scaled according to their percentage of 2017 total production.
• Crude & condensate proved reserves are estimated to be 6.3 billion barrels. All but 300 mmb of
this increase were because of higher oil prices in 2017 vs. 2016.
• About 1/3 of proved reserves are undeveloped.
• This analysis suggests that at present production rates, Permian tight oil reserves will last
approximately 7 years (2024).

Labyrinth Consulting Services, Inc. artberman.com Slide 15

 Permian Basin & Eagle Ford Shale from a Global Perspective
Permian Basin & Eagle Ford Tight Oil Plays Have Respectable 3rd Tier Liquids Reserves Tight Oil Is a Marginal Business At Best
Compared With Producing Countries in the World 73% of Companies Lost Money (Capex > Cash From Operations)
350 Based on 10-K Filings for Full Year 2017
9

*Chesapeake has not filed a 2017 10-K but Capex-Cash Flow cannot
8 8.3 be calculated because cash from operations was negative through Q3 2017
300

Ratio of Capital Expenditures to Cash From Operations

7
Proved Reserves of Liquids (billions of barrels)

Source: EIA & Labyrinth Consulting Services, Inc.

250

200
5 5.3

4
150

Break Even
3

100 Lose Money Make Money

2 Capex > Cash Flow Cash Flow > Capex
2.0
1.8
50 Permian Eagle 1.6 1.5 1.5 1.5 1.4 1.4 1.3
1
Basin Ford 1.2 1.1 1.1 1.1 1.1 1.0 0.9 0.9
0.7 0.7 0.6
0
0

Concho

Diamondback
Apache

OXY
Whiting

ConocoPhillips
Continental

EPE
Murphy
Callon

Statoil

Marathon
Laredo

Pioneer
Parsley

Hess

Devon
Oasis

Sanchez

EOG
Energen

Newfield
Russia

Indonesia
India
Ecuador
US

Australia
Kazakhstan

Brazil
China
Libya

Norway

Egypt
Vietnam
Canada

Qatar
UAE

Permian

South Sudan
Angola

Oman
Algeria

Eagle Ford
Iran

Iraq
Saudi Arabia

Kuwait
Venezuela

Mexico

Azerbaijan
Nigeria

Yemen
Source: Yahoo Finance & Labyrinth Consulting Services, Inc.

• Tight oil plays are an important, late addition to world oil supply.
• Tight oil has added substantial short-term volumes that have disrupted oil markets.
• Permian basin and Eagle Ford plays have respectable 3rd tier reserves compared with world producing countries.
• Reserve estimates should not be taken too literally because the record of discovering new supply beyond reserve
expectations has been consistent.
• Still, unconventional oil was only possible with higher oil prices, zero-interest rates & massive outside capital.
• Tight oil has consistently lost money & lost money in 2017.
• The perception that recent prices are low must be placed in constant-dollar context.
• Our rush to produce, consume and export as fast as possible is based on a false belief that supply is inexhaustible.
• The assumption that a seamless transition to renewable energy is as delusional as most popular misconceptions
about oil. Humans have never gone from higher to a lower density source of energy.
• Energy is the economy & a lower energy density economy will be nothing like the post-WWII U.S. economy.

Labyrinth Consulting Services, Inc. artberman.com Slide 16