Oil and Gas Price Impacts on Indian Country Oil & Gas Production Assistant Secretary – Indian Affairs

Division of Energy and Mineral Development

April 22, 2015

Summary of Economic Contributions Bureau of Indian Affairs - FY 2013

% of Total Value Added

% of Sales Value

Oil, Gas, Coal

5.52

90.8

17.21

90.4

9.82

92.6

66,375

76.4

Minerals

.06

1.0

.15

0.8

.08

0.8

859

12.3

Subtotal

5.58

91.8

17.36

91.2

9.90

93.4

67,234

88.7

Irrigation

.43

.1.05

9.758

Timber

.04

.53

2,294

Grazing

.04

.09

1,381

6.08

19.03

Total

Total Value Added ($ billions)

% of Total Domestic Jobs Supported

Sales Value ($ billions)

Commodity

% of Total Economic Contribution

Total Domestic Jobs Supported

Total Economic Contribution ($ billions)

10.60

80,668

Source: Table modified from The Department of the Interior’s Economic Contributions – July 9, 2014 Chapter 2 – Bureau-Level Economic Contributions

Historic Natural Gas Prices

• Current Natural Gas price is $2.58 per MCF • Gas will remain in the “shale gas price band” for many years − LNG gas exports (when on line) should firm prices

Historic Oil Prices

• Oil Prices remained steady to 2002 with balanced supply and demand • Prices increased 2002 to 2008 as demand increased (U.S., China & India) • U.S. banking crisis collapses world economy – oil prices drop with demand • Bottom ($32.94 / bbl) lasts 1 year with recovery to $70 / bbl in 2 years • U.S. & Canadian production reduces U.S imports 15 million barrels per day • Will the 2015 recovery mirror the 2008 recovery?

Rig Count • Current U.S. rig count – 998 o Down 843 rigs from 4/2014

Baker Hughes Weekly Active Rig Count - Current to 3/13/2015 (Number of Rigs Drilling for Oil, Gas, and Total)

2,500

Number of Active Rigs

2,000

1,500

1,000

500

0

Oil Gas Total

FACTORS AFFECTING OIL PRICES FOR 2015 Supply and Demand

• China’s Economy – Second largest consumer of oil in the world is now experiencing a lower demand for oil owing to a slowing economy. • U.S. Shale Plays – Drilling activity resulted in 80% increase in oil production from 2007 levels. The U.S. petroleum industry developed innovative technology to produce oil and gas from poor quality reservoirs and has been very successful, but at a cost of $70-80/ BBL. With WTI benchmark below $50/ BBL, rig counts will drop. Wells on production will likely continue, the average cost to operate an existing well in most of the US is around $20/BBL + $5. • Demand – It’s likely that demand will remain constant but decreasing rig counts will result in lower supply. • OPEC – The wild card in manipulating supply. Saudi Arabia has lowered prices by not cutting its production claiming they want to gain “greater market share,” much to the vexation of its OPEC partners (e.g., Venezuela, Iran, Nigeria) and non-OPEC countries like Russia.

Oil Price Projections Will the price of oil stay low or recover, and at what price? How long will it take for prices to recover? • Historic Oil Prices 1986 – Present

o Past events may provide insights of what to expect in the future

• Oil trades in U.S. Dollars ($) on the World Stage

o Strength and Weakness of the Dollar affects oil prices o Oil is a global commodity and affected by global events

• Breakeven oil prices in other producing countries

o National oil companies provide the necessary revenue to run their respective governments o Low oil prices affects the value of their currency and their ability to service debt, and maintain social programs

Fiscal Breakeven Oil Prices for Selected Petro States

Taken from: Hirst, T., 2014, For Some Nations, Saudi Arabia’s Oil Price War is an Existential Threat: Business Insider, November 27, 2014, (http://www.businessinsider.com/saudi-arabia-opec-and-the-price-of-oil-2014-11) visited 1/6/2015

BREAKEVEN ESTIMATES Key Plays Break Even: Simply Stated “The oil price necessary to drill and complete a well with no profit or loss” • Williston Basin - Bakken Play (Fort Berthold, Fort Peck) – Ranges from $66 to $117/BBL • Uinta Basin (Uintah & Ouray) Ranges from $68 to $130 /BBL • San Juan Basin - Gallup Play (Jicarilla, Navajo) – Approximately $85 / BBL

Breakeven Estimates for US Shale Plays on or Near Reservation Lands (modified from Wood Mackenzie, Oct., 2014)

$140

$130 $117

$120

US $ /boe

$100

$89

$80 $60 $40 $20 $0

$59

$60

$66

$70

$72

$73

$75

$76

$78

$90

$101

$95 $85

$81 $68

Production Trends – 13 Producing Tribes Total Wells Drilled - All Tribes

Monthly Gas Production - All Tribes

Wells

15000 10000 5000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0

Year 9000000 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Barrels Per Month

Monthly Oil Production - All Tribes

Year

70000 60000 50000 40000 30000 20000 10000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

MMCF Per Month

20000

Year

In the past 20 years: • Producing wells have increased by 11,000 • Gas production has increased 38 billion cubic ft. / month • Oil production has increased 6.3 million barrels per month

Production Trend for 9 Producing Tribes Monthly Gas Production - 9 Tribes

5000

7000

4500

6000

MMCF Per Month

4000 3500 3000 2500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Year

5000 4000 3000 2000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Wells

Total Wells Drilled - 9 Tribes

Year

Monthly Oil Production - 9 Tribes

700000 600000 500000 400000 300000 200000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Barrels Per Month

800000

Year

Eliminating the 4 top producing tribes reveals: • Declining oil production − 3 tribes at “stripper” levels − Large impact on income with low oil • Rapidly declining gas production − 9 tribes with “depleted” gas resources − Low gas prices = no interest in drilling − No near term relief in sight

Natural Gas Production and Prices in Indian Country • Natural gas prices are expected to remain at current levels for the near future owing to the surplus in supply • Tribes can expect that drilling activity for natural gas in the western basins will remain low • LNG and gas exports, switching from coal to gas fired power plants would eventually have an affect on the gas surplus • Low oil and gas prices are expected to have no influence on planned pipeline construction

Oil Price Forecast • 2008 plunge in Oil price was driven by: – U.S. banking crisis and recession • Oil bottoming mid year 2009 followed by price recovery to $70 / bbl by summer 2009 – Increased rig count starting summer 2010

• 1986 price collapse was driven by OPEC overproduction – OPEC regaining market by dramatically increasing production – Price recovery required 12+ years

• 2014 price collapse is driven by OPEC overproduction – Uncertain how long low oil prices will be with us – Middle East conflict, war etc. could change price trajectory

• Tribes should anticipate no price recovery for many years.

Production Summary

W H A T S U P

• Indian royalty revenue to $1.1 Billion • Number of Producing wells • Oil Production – Overall production increase due to drilling activity at 4 reservations

W H A T S

• Oil Prices • Weak gas prices • The energy industry

D O W N

• Oil & gas production for 9 tribes • Number of IMDA agreements

− Personnel layoffs − Reduced budgets

Tribes should anticipate continued declining production, weak industry interest for new leases, & limited price relief.

Impact of falling Oil Prices in Indian Country Precipitous decline in oil prices from $105 / barrel to current $48 / barrel over 6 month period • Sustained low oil prices will have an effect

o Tribes with production will have dramatic revenue reductions from producing wells and should adjust budgets accordingly o Operators’ drilling budgets will be adjusted accordingly, resulting in fewer drilling permits o Reductions in new wells will reduce income to tribes and allottees

• Price stability is required to determine levels of activity – where is the price floor and when and at what price will it recover?

o Operators will continue to drill to earn, or maintain leases as necessary but will postpone development drilling as needed o Anticipate an increase in the formation of Federal Units to maintain leases possible renegotiation of lease terms, or dropping leases altogether o Future exploration projects will be curtailed until there is sustained price recovery (est. > $70-$80/BBL depending on the formation and basin)

Impact of falling Oil Prices in Indian Country Positive opportunities for tribes when prices are low • Price stability is required to determine levels of activity – Once price recovery has occurred and appears to have strong market support o Exploration may eventually return when the economics are favorable o Tribes could expect leasing to return once prices are favorable but, bonus payments and royalties will be adjusted and will not be as robust before the price collapse

• Sustained low oil prices will have an effect on operators

o Operators may decide that they can no longer produce wells at depressed prices because of inherent high overhead and operating expenses, consequently they would be willing to sell their production o Tribes should anticipate the opportunity to take over producing properties and become an operating entity – Tribes will need to: • Have a technical review of the properties before submitting a bid • Have financing arranged in order to acquire the properties • Have structured an operating framework that includes experienced technical and field personnel