1506-1541919 Argentina World Shale Presentation 2015_FINAL_UPDATE

Balancing infrastructure choices

and demand in Argentina

Alex Fleming, Senior Manager, Oil & Gas

Ernst & Young LLP

The current pace of operations in Vaca Muerta is only a small fraction of the potential

Sources: Wood Mackenzie Upstream Data Tool, EY Proprietary Impact Model and Research

EY developed a proprietary projection based on the latest news from Vaca Muerta. This

projection is inherently uncertain and is only used to illustrate the possible

infrastructure needs. The key assumptions are based on:

• Number of operational rigs capable of drilling horizontal wells reaching 140 in 2027

• Average lateral length rising from 1,000m to 1,500m over 10 years

• Material usage patterns modeled off US plays, a middle ground of Eagle Ford, Bakken and

Niobrara; completions in five well pads

• Average drilling and completion cost per well dropping from US$ 7m to US$ 5m in 2027

EY infrastructure impact model Primary scenario for this presentation

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Primary scenario growth projection

Operating rigs New well pads D&C Capital

A moderate well pace will lead to rig, fracturing, material and labor demands far beyond current capabilities

Sources: EY Proprietary Impact, Demand, and Labor Model, Wood Mackenzie Upstream Data Tool

Vaca Muerta activities in the primary scenario

2016 – 1.0 million-1.6 million truck movements, with

approximately 400,000 long-distance movements

• 6.8 billion liters of water for fracturing

• 1.1 million metric tons of proppant

• 77 thousand trucks of flowback (waste) water

2020 – 1.2 million-1.9 million moves; 450,000 long

distance

• 12.2 billion liters of water for fracturing

• 1.9 million metric tons of proppant

• 138 thousand trucks of flowback water

Infrastructure

149 FTE (full-time equivalents) per pad

38,318 FTE Direct labor at peak (2027)

247,873 FTE Wider supply chain impact

119,745 FTE Induced by employee activity

Total 405,936 FTEs at peak (2027)

Labor

2016 – 551,000 BOE/day

2020 – 1,165,000 BOE/day

2027 – 2,628,000 BOE/day

(Based on 600 BOE/day average in year one

and 100 BOE/day average in follow-on years)

Potential production

2016 – 72 drilling rigs, 13 fracturing spreads

pumping 10,211 stages using 372,280 HHP

2020 – 85 drilling rigs, 24 fracturing spreads

pumping 18,267 stages

Services

Total ~406,000 FTEs at peak in 2027

~75% growth in required labor force in

region or rotating/traveling

(Introduced into region with 632k people in

2010 labor force Neuquén Province, La Pampa

Province, Malargue Department(Mendoza),

Cities of General Rosa, Cipolletti (Rio Negro);

with 61% labor force participation)

Infrastructure/population

Units in USD except where noted

2016 – US$6.4b capital (D&C) and US$9.9b

overall economic impact

2020 – US$7.1b capital and US$11.9b overall

economic impact

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) Activity intensity

Meters drilled Truck moves required Pumping hours (fracturing)

Cross-functional impact

on every part of society

Import-reliant models of supply are putting expensive materials at the end of complex 1,200 km funnel

Sources: EY Vaca Muerta Geographical Impact Model, US Department of Transportation Highway Capacity Model for Rural 2 lane roads

• Rural two-lane roads are severely limited,

even without accidents, urban congestion

and agricultural busy season.

• Road capacity alone will become

insufficient within two years of the

primary scenario (under the best

assumptions).

• Rail capacity can supplement a

significant amount of proppant inbound

and crude oil outbound to refineries (with

new tankers).

EY infrastructure impact model

Total long-distance road

inbound delivery capacity for

O&G: 350,669 vehicles per year

Assumptions: 1/3 personal traffic, 1/3

agricultural, 1/3 commercial (half of

commercial is Vaca Muerta related);

perfect backhaul capacity, unlimited

drivers, minimal delays or accidents

Total rail capacity on Ferrosur

route: 274 train loads

Assumptions: 191 cars available, unit

trains of 35 cars, 4-day travel time, no

scheduling conflicts, no backhaul

delays, no agricultural interference

There are key gaps in current capabilities, and some areas are starting from minimal infrastructure

Sources: EY Proprietary Impact Model and Research

Labor dynamics

• There is need for sufficient trained and qualified labor to maintain safety and

efficiency for nearly 38,000 direct laborers

• The families and communities for those workers with almost 120,000 jobs induced

by employee activity, most of which will be in remote areas , need to be supported

Gaps Infrastructure need

Logistics capacity

• Road capacity needs immediate investment increase capacity (passing lanes, urban

bypasses, continual cement upgrades)

• Current rail cars will rapidly become overscheduled; multiple lines with full 100-car

unit train capacity will help alleviate

• Any delays in one material could stop work on multiple wells and pads; the cost of

downtime is significant even in 15-minute increments with the assets deployed

Suppliers in country

• Long-distance moves will become a limiting factor, so local capabilities are key to

success and risk mitigation

• Reducing the proppant, cement, OCTG, chemicals and mud additives coming from

Buenos Aires can improve the situation; any imports add to the choke points

Community support • Lessons from the Bakken in North Dakota show that stable communities with

families and infrastructure reduce the burden of increased activity

• Companies must build an entire “community supply chain” for workers and families

Outbound product movement will overwhelm current capabilities, but international investments rely on guaranteed revenue

Sources: Wood Mackenzie Upstream Data Tool, EY Proprietary Impact Model, BP Statistical Review of World Energy 2014

Production projections will be rapidly changing, but

firms rely on reliable revenue and product sales to justify

investment.

2016 – 551 thousand BOE/day (Net new production)

2020 – 1,165 thousand BOE/day

2027 – 2,628 thousand BOE/day

15,530 wells brought online from 2016–2027

Current Argentina refining capacity –

622 thousand BOE/day

• Are there opportunities for local usage to support

activities?

• Which pipeline, crude by rail and other pathways are in

progress?

• What are the refinery destinations?

Takeaway capacity

The local government and private sector leadership must develop a way to monitor status and address bottlenecks

Sources: EY Vaca Muerta Geographical Impact Visual

Can port and urban

traffic patterns adapt to

the required

transloading?

How will soy and maize

harvests impact traffic

patterns and the

inevitable road

improvements required?

Can the role of Bahia

Blanca be changed to

take the load off BA?

Which investments are

the fastest to

operationalize?

Are network models

looking at the regional

capabilities around

Neuquen and choke

points in the river valley?

Can local suppliers be

spread out and corridors

established to reduce

long-distance moves?

What are the local risks

around seasonal access,

flooding and the

geographic constraints

for vehicular traffic?

Supplier, infrastructure, and labor capacity must have a multi-year investment and phased development to mitigate the highest impact requirements

Sources: EY Proprietary Impact Model and Research, EY Shale Infrastructure Development Methodology

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Drill rigs 72 76 80 83 86 93 101 109 117 124

Fracturing spreads (crews)

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35

Long-distance

inbound requirements (truckloads – low case)

318,893

337,978

354,981

369,208

380,312

414,665

449,365

483,718

518,071

552,771

Waste water disposal (truckloads)

46,035

47,880

49,320

53,775

58,275

62,730

67,185

71,685

76,140

80,640

Fracturing horsepower

required (Hhp)

372,280

568,167

932,422

969,792

998,958

1,089,193

1,180,339

1,270,573

1,360,807

1,451,953

Full-time drivers

1,072

1,136

1,194

1,241

1,279

1,394

1,511

1,626

1,742

1,859

• Logistics corridors at full

capacity

• Communities established

• Sustainable local supply

with risk planning

• Local labor pipeline

Transformed

• Begin planned

communities

• Bring recycling

capacity online

• Convert to local fuel

sources

Sustainment

• Identify risk categories

• Identify local leadership

• Arrange for capital

• Invest in fleet

• Build asset rotations

• Move key leaders

• Replace long-distance

runs

Build local Remove bottlenecks

• Address road capacity

• Begin rail construction

• Continue housing upgrades

• Conduct rapid training

programs

International players will invest if they can mitigate their risk and maintain predictable and repeatable D&C costs and product revenues

Predictable outcome and risk profile encourage international investment and local entrepreneurship

Goal 1: Returns Goal 2: Adaptability Goal 3: Sustainability

Unconventional uncertainty and complexity

► Investments attempt the impossible balance of having a steady pathway in an increasingly complex

environment with multiple interacting stressors

► Players must have a clear macro understanding of the most likely and black swan scenarios and have the

ability to react and reshape the firm as needed

D&C risk Regulatory risk Externalities

► Classifying risk and maintaining a networked and visible viewpoint for the team allows for as much mitigation

as possible

► Once the framework is established, then process improvement is possible while maintaining a view to

decisive reaction

Efficiency Event and crisis management

► Global, external and internal decisions must be as repeatable as possible in the medium term

EY Advisory works with governments, E&P operators, oil field service companies and suppliers to optimize unconventional performance

Global O&G network

For more information, please reach out to:

Alex Fleming – [email protected]

Fabian Gomez – [email protected]

Enrique Grotz – [email protected]

Jim Franks – [email protected]

Appendix

The impact of shale development manifests itself in infrastructure, labor markets and government regulatory efforts

Infrastructure

Situation

The rapid increase in economic

activity raises the number of workers,

transients, support and logistical

needs for communities within the

field and the supply chain locations.

Complications

Many communities are small and not

able to deal with the sheer number of

people; basic services become

strained to the breaking point. The

pace of “normal wear and tear”

increases exponentially.

Example impacts

• Road paving falls behind.

• Temporary housing cannot be built

fast enough.

• There are insufficient

restaurants/stores.

• Schools/hospitals are overloaded

and understaffed.

Labor

Skills

Shale fields require all relevant petroleum

and services skills, as well as support for

all logistical and administrative activities.

Even with complete labor participation,

“rotator” workers have been required in

almost all US shale fields.

Education

Schools and universities will need to

rapidly focus on vocational training for

drivers, industrial fields and waste

management, as well as normal

engineering and management skill sets.

Example impacts (US$)

• A truck driver in the Bakken can make

US$100k−US$150k per year (the same

as an experienced engineer or MBA in

other places).

• Retailers and fast food chains in

Williston are offering signing bonuses

(~US$10k) to attract entry-level staff.

Regulation

Landscape

Impacts from shale permeate to air, water,

land and basic infrastructure. These areas

fall under different laws and areas of

influence.

Complications

Many provinces and localities will assert

the needs of citizens through (sometimes)

ill-informed local decision-makers. Though

these people are not the mineral owners or

investors, they have the ability to stop work

through other choke points (local labor

unions, community organizations).

Example impacts

• Several towns and counties in

the state of New York banned fracturing

altogether.

• Labor unions in several states negotiate

directly with E&P companies to put

pressure on service companies and

suppliers.

300 quantitative assumptions based on

field planning and well pad design

EY’s proprietary work developing impact models has been used to support analysis for clients and governments

Governments/regulators

• Anticipated needs for capital

• Revenue projections and assumptions

• Inferred tax benefits

• Required infrastructure investments

Operators

• Projected investment by function

• Supplier qualification needs

• Projections of service volumes

• Direct and indirect labor needs

Oil field services companies

• Projected market size by service

• Manufacturing planning needs

• Logistical spend estimates

• Headcount projections

Suppliers/support infrastructure

• Material requirements by commodity

• Logistics assets and usage

• Investment requirements to meet capacity

• Market size estimates

Inputs/assumptions

EY shale

demand model

EY shale

labor impact

model

Well/pad/HV

assumptions Labor rates/

price indexes

Standard

material

inputs to pad

and laterals

Logistics and

infrastructure

needs

Key assumptions (preliminary) • Shale extraction would move quickly toward “pad development” with groups of horizontal wells in a

single site going in different directions (five or eight well groups) with single test well per pad.

• Real exchange rates with Argentine pesos and world currencies remain stable.

• There are sufficient supplies and labor to meet growth projections.

• Well designs are simple multistage plug and perforation slickwater fractures.

• Multilateral completion techniques are not used..

• Material inputs and services are relatively comparable to mixed shale fields in the US.

Possible outputs

Legend:

Operator owned

First-level vendor/contractor/partner/customer operated

Second-level vendor/contractor/partner/customer operated

Players must take a collaborative, integrated approach to manage the impact of this transition and the complexity of operations

E&P operators/

JV partners

Government | Communities | Universities

Oil field service

providers Suppliers Midstream

Refiners/

exporters

Intrafield operations and logistics

Well

pad E

Well

Pad D

Well

pad B

Well

pad C

Well

pad A OEMs/

distributors

Operator

RDC

OFS

provider

warehouse

Supporting network-providing

material, equipment and services

Supporting midstream

value chain network

OEMs/

distributors

Production Collection

terminals

Pipeline

networks

Processing

plants

Well

pad F

Site prep/

construction

contractor

Water

supply

and

disposal

wells

Sand/

proppant

staging

yard

Specialty

chemicals

On-site

production

storage

Cement

provider

Pipe/

tubing

supply

yard

MRO flow

Sand/

proppant

supply

source

Pipe/tubing

manufacturer/

distributor Expedited/rushed/

hotshot runs

Rail

Road

Pipeline

Illustrative example

Well

pad G

Drilling

contractor

On-site

MRO

storage

Government regulators must have a consistent approach across provinces to confirm that private companies act in the best interests of the community

Operational reality for E&P operators

Framework for regulatory accountability

Federal regulation Provincial regulation Local/department

regulation

Local control areas Defined provincial

direct control areas Defined federal

direct influence areas

Water table

Waste/landfill

Population impact

Transport

Supplier plants

River basins

Inter-regional waterways

Strategic natural resources (coal, steel, fuel)

Trade/customs

Lo

ca

l im

pa

ct

Inte

rna

tion

al

imp

ac

t

Oceans

Impact spectrum

Mutually exclusive, collectively exhaustive =

Effective regulation must have no gaps or overlaps and must provide consistency for investors and E&P operators

Cooperative

service

agreement

Cooperative

service

framework

Unions

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Visuals used with permission from Wood Mackenzie Upstream Data

Tool.

© 2015 EYGM Limited.

All Rights Reserved.

CSG no. 1506-1541919

ED 0615

EYG no. DW0537

This material has been prepared for general informational purposes only and is not intended to

be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for

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1506-1541919 Argentina World Shale Presentation 2015_FINAL_UPDATE

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