Economic Opportunities in Unconventional Gas Colin McNaught Ricardo-AEA Industrial and Power Association Network Meeting 12 June 2013

1. Economic Opportunities in Unconventional Gas
Colin McNaught
Industrial and Power Association
Network Meeting
12 June 2013

2. Introduction
• Covers some results from report to Scottish Enterprise on the
economic opportunities global unconventional gas
• Recognises that global opportunities exist and some Scottish
companies have already moved to exploit these
• Unconventional gas is an opportunity and a threat to the oil and gas
industry in Scotland.
• So important that potential suppliers of goods and services make
informed responses about their involvement

3. Agenda
• Where are the opportunities?
− Review of selected markets
• How big is the opportunity?
− Review of economic impacts
• What are the specific opportunities?
− Supply chain analysis
• Conclusions

4. Global Resource
• Shale gas reserves are much more common than conventional gas
reserves.
• Offers countries with no past in hydrocarbons to develop indigenous
resources, with security of supply and energy cost benefits.
.

5. Impacts on gas prices in the US
Comparison of traded prices for natural gas in $/Mmbtu: 1994 to 2011

6. Factors that drive markets
Factors
Scale of resource The amount of recoverable gas
Accessibility of resource The cost of physically accessing the gas
Security of supply benefits A key driver for Government and regulators
Long distance gas pipelines Access to markets for gas production
Skilled oil and gas workforce Needed across all stages of project development
Supporting infrastructure Road, Water etc.
Stable regulatory system For permits to develop and operate as well as fiscal incentives
Privately owned mineral rights
Was a key factor in the US, but other markets have
government owned rights
Socio-Political acceptance An important influence on planning and regulation

7. Markets Studied: USA
• Largest and most established unconventional gas market.
• Short term lower gas prices are reducing development.
• But an equilibrium is likely to be reached, where the pace of new
development is appropriate for the price of gas.
• If this equilibrium is reached at lower levels of market development,
the scope for Scottish suppliers will be much reduced, as the local
experienced supply chain will be less stretched.
• However if the pace of development remains high, or the supply
chain is stretched by addressing the shale oil or tight gas markets,
there will be greater opportunities for Scottish suppliers.

8. Markets Studied: UK
• While the UK does not have the highest reserves, the existing
regulatory framework for oil and gas development is in place and
supports extensive conventional oil and gas investment.
• Recent developments announced to encourage shale gas
development:
− Tax incentives as a shale gas field allowance which would extend the ring-
fence expenditure supplement from six to ten years for shale gas projects.
− Technical planning guidance on shale gas by July 2013 to provide clarity
around planning for shale gas.
− Proposals to ensure that local communities will benefit from shale gas
projects in their area.
• The developments make the UK a most promising opportunity for
growth.

9. Markets Studied: Poland
• After initial investment, shale gas developments appear to be
stalling.
• Government approach to regulation and role of state owned
companies reduces opportunity in Poland.
• Market for gas services in Poland is dominated by a very large
subsidiary of the state-controlled monopoly with over 50 land rigs,
this leaves very little space for other players, apart from:
− Specialist services, which are not available on the local market;
− Equipment and products
• Market opportunity in Poland is small and specialist, and is likely to
remain small for some time to come.

10. Economic Impact Assessment
• Understanding the economic impacts signposts to the areas of
greatest job and value creation and hence the company level
opportunities.
• Economic data is necessarily US based, as this the main market
thus far.
• Several US studies conducted:
− US level
− State level
− Shale play level

11. US Wide Impact
• A study by IHS in October 2012 assessed the economic impacts of
unconventional oil and gas on the US economy.
• Covered unconventional oil, tight gas and shale gas.
• The headline findings for shale gas only were:
− Upstream capital investment in 2012 of $87 billion
− Lower 48 employment of over 900 thousand in 2012
− Valued added of $121 billion in 2012
− A projection that capital expenditure of almost $3.0 trillion would be made
in unconventional natural gas activity between 2012 and 2035.

12. US Economic Impact
• For the US market this strongly suggests that the direct
opportunities are in the mining and manufacturing elements, e.g.:
− Drilling rigs, fracking and associated equipment. Scottish companies
need inventory of equipment in the US to provide the drilling services,
consumables and equipment.
− Manufacture of equipment. This includes the capital equipment (drilling
rigs, frack trucks, frack pumps, mud pumps, well heads etc.) and the
consumables (drill mud, tubulars, etc. ).
• The indirect impacts are greatest in the service sector. Moving
experienced professional staff around the world is already a
common element of the oil and gas service industry.
• The labour opportunities are also greatest in the service sector. As
many Scottish oil and gas workers operate as one person
businesses, this is a potential opportunity for these individuals.

13. UK Economic Impact
• Using US analysis and transposing this to UK
• Using capex and well numbers for the UK’s Bowland Shale
− A mid scenario of well development of 400 wells drilled over a period of
9 years.
− A capex of £10.5 million per well
• Estimated value added of £7.7 billion
• Expectation that estimates of UK shale resources will increase with
new BGS data, may increase economic impact

14. Supply Chain
• Many elements of the unconventional gas supply chain are also part
of the conventional supply chain.
• Unconventional sector has important differences:
− Cost base, margins lower, with high capex for the total recoverable
resource
− and service levels that are required for economic success in the
unconventional gas market.
• The global market for specialist equipment and services is the main
prize for Scottish suppliers
• Development of unconventional gas in UK may also provide
additional opportunities for local providers of non-specialist goods
and services.

15. Supply Chain
The early stage development markets have the greatest need for
innovation or adaptation of existing supply chain offers. Hence:
− Scottish companies wishing early market share will need to invest now to
match the short and medium term exploration and development
opportunities.
− These earlier stage opportunities may have higher barriers to entry as they
may need prior experience in the unconventional gas sector. There will be
established competition in the exploration and development phases, albeit
predominantly US based.

16. Conclusions
• Short term market will be dominated by the US
• US market factors are unique, but there is potential growth in UK,
Australia and other markets
• Scottish companies have acquired businesses in the US to break
into the dominant market
• Specialist Scottish suppliers have orders for Australia and other
markets
• Scottish Enterprise now considering options to support export
potential.