The Treadmill Speeds Up.

The Treadmill Speeds Up. March 7, 2016 Brian Hamm

1. Notes and Disclaimers 2. Recent History of Canadian Upstream Production 3. Historical Decline Rates How Fast was the Treadmill Spinning? 4. Forecasting the Blowdown Scenario Who Sped Up the Treadmill? 5. Forecasting Future Development How Fast Can we Run? 2

» All production is based on publicly available raw wellhead oil, gas and condensate production.» A number of companies report condensate production as recombined raw gas. As a result gas volumes are higher than actual and condensate volumes are lower than actual.» Condensate volumes that are publicly reported have been rolled together as Oil for all plots.» All references to the word Oil is intended to mean Oil and Condensate Production excluding Bitumen.» The production and forecasts presented herein for the Canadian oil and gas industry were prepared by McDaniel. This historical information is based on information obtained from various sources, including government agencies, third party data providers and industry publications. The information was accepted as is, and McDaniel accepts no responsibility for any inaccuracies within it. The forecasts presented here are based on an informed interpretation of the information.» Readers of this information are asked to recognize the high degree of uncertainty associated with forecasting oil and gas production and development, and McDaniel takes no responsibility for the application of these numbers by anyone. Users of this information do so at their own risk, and McDaniel and its officers, directors, consultants and employees shall not be held responsible or liable to any users for any reliance that may be placed on the information. 3

» Canadian Production is ~7.0 MMBOE/d as of Q4 2015» There has been growth of ~1.0 MMBOE/d since Q1 2008 (8 years)» The majority of this growth can be attributed to bitumen production» Aside from bitumen, the vast majority of new production has come from horizontal wells since 2008. 4

» Canadian Oil Production is ~3.9 MMBbl/d as of Q4 2015» There has been growth of ~1.2 MMBbl/d since Q1 2008 (8 years) effectively all from bitumen 5

» Canadian Bitumen Production is ~2.4 MMBbl/d as of Q4 2015» Most of the growth since 2008 has been from SAGD 6

» Excluding Bitumen, Canadian Oil Production is ~1.4 MMBbl/d as of Q4 2015 and has been fairly steady at that rate.» In general, decline from vintage wells drilled pre 2008 has been offset by new vertical and horizontal drilling.» At ~700mbbl/d roughly 50% of current oil production is from horizontal drilling since 2008. 7

» Prior to 2015 HZ Oil directed drilling was approximately 5000 wells per year.» As a result production grew quickly and peaked at ~800Mbbl/d in Dec 2014.» With drilling down by ~50% in 2015, production has followed and is now off the old peak by over 100 Mbbl/d 8

» The growth in HZ oil has come from many plays.» No single play accounts for significantly more than 100mbbl/d.» For modelling purposes, we have grouped everything but the six largest and most active plays which account for ~2/3rds of new production. 9

» Canadian Raw Gas Production is ~18.9 Bcf/d as of Q4 2015 and has been fairly steady at that rate.» Decline from vintage wells drilled pre 2008 has been offset by new vertical and horizontal drilling.» At ~10 Bcf/d, more than 50% of current gas production is from horizontal drilling since 2008. 10

» Recent HZ gas drilling has averaged ~1500 wells per year.» This level of drilling has led to growth of ~10Bcf/d in the span of eight years.» Drilling was down in 2015 from 2014 levels but still relatively robust. 11

» The growth in HZ gas production has been dominated by two plays: the Montney and the Deep Basin Spirit River.» The Montney alone accounts for ~50% of all new production since 2008 or roughly 25% of total Canadian production.» For modelling purposes, we have grouped everything but these two largest plays which account for nearly 70% of new production. 12

» It is a common saying in our industry that companies ultimately end up on a treadmill, whereby it requires a certain pace of drilling in order to keep production flat or stay whole» At the company scale it can often be hard to keep up, especially in new plays where most of the production is coming from new wells which have higher declines and thus require more incremental production adds each year than a more mature field.» It is no different at the National scale, where as shown, more and more of the total supply is derived from relatively new wells. Compounding this is the fact that modern day wells tend to have materially higher initial decline wells than the conventional producing base. 13

» With most of this new oil coming predominantly from fracced multistage wells with relatively high initial decline rates we should expect the basin decline rate to be increasing.» This plot compares the drop in production from December of one year to December of the next year for each vintage of added production.» Recently it requires 322 to 390mbbl/d of adds to keep total production flat year over year which is materially higher than it was just a few years ago» This equates to a total decline of 20 to 25%. 14

» New Gas production is similarly coming predominantly from fracced multistage wells with relatively high initial decline rates.» This plot compares the drop in production from December of one year to December of the next year for each vintage of added production.» Recently it requires 3.0 to 3.5 Bcf/d of adds to keep total production flat.» This equates to a total decline of 17 to 20%. 15

» We have shown that decline rates are increasing and therefore the production addition requirements to keep total production flat are also increasing.» We also know that the production trends from these horizontal wells is very hyperbolic and in many cases with hyperbolic exponents greater than 1.0. Maybe it will just flatten out?» What would happen if all drilling stopped? 16

» In order to arrive at a reasonable future forecast of existing production we under took a number of steps:» Forecast Vintage Production by Decade and add them together (e.g.. 1980 s Gas) 17

» Forecast Recent Vertical Drilling by Year and add them together (e.g.. 2010 Gas Verticals) 18

» Breakout the recent HZ drilling into like plays and forecast each year. (e.g.. 2011 Montney BC South Gas HZ) 19

» Next, Add it all up: 20

3.8 This forecast results in a 3.8Bcf/d decline in 2016 from existing wells 21

» Do it all again for Oil: 339 This forecast results in a 339Mbbl/d decline in 2016 from existing wells 22

» Despite prices where they are currently there is still some drilling taking place so can we forecast what to expect?» With a few assumptions we can build a model to test the basins resilience to reduced drilling levels» Since 2016 is still up in the air lets try to model 2015 drilling levels and see what happens. 23

» Similar to the blowdown model lets build type curves for each play and build out the forecast.» For this step we lean heavily on our internal database of over 40,000 producing horizontal wells sorted by play. 24

» Compare Results for each play by Vintage, Completion Type, etc.» Create a single Type Curve for future development (Don t tell your reserve evaluator) (e.g.. Deep Basin Spirit River by Vintage) 25

» Combine the Type curve with recent drilling Rates: 26

» Combine the Type curve with recent drilling Rates: (Based on 2015 drilling activity levels held flat) 27

» Repeat and sum for all plays that are seeing active development: (Based on 2015 drilling activity levels held flat) 28

» Repeat and sum for all plays that are seeing active development:» Notably even at somewhat depressed 2015 drilling levels, HZ gas production continues to grow. (Based on 2015 drilling activity levels held flat) 29

» Now add the future development onto the rest of the base production» 2015 Drilling levels are enough to effectively hold gas production flat.» The treadmill is getting faster but we now have stronger legs! (Based on 2015 drilling activity levels held flat) 30

» What about oil? Lets follow the same process.» Build out a drilling schedule for all active plays based on 2015 activity levels. (Based on 2015 drilling activity levels held flat) 31

» Repeat and sum for all plays that are seeing active development:» Similar to the drop seen from 2014 to 2015, these activity levels cannot sustain current HZ production levels. (Based on 2015 drilling activity levels held flat) 32

» Similarly vertical oil development continues its decline as well. (Based on 2015 drilling activity levels held flat) 33

» As a result Total Non Bitumen Oil production continues its decline. (Based on 2015 drilling activity levels held flat) 34

» What about Bitumen?» Lets make some basic assumptions that projects under construction are completed and that existing capacity is kept full by way of sustaining capital. (Based on 2015 drilling activity levels held flat) 35

» What if we want to maintain non bitumen levels at ~1.5MMbbl/d?» Based on our model this level of production would require a return to 6500+ oil targets per year.» Clearly these plays do not have an unlimited inventory of locations and it is likely that the existing type curve may change. (Estimated Drilling Activity required to Hold Flat)» Alternatively continued performance improvements resulting from completion enhancement as well as secondary recovery on existing development could change the picture. 36

» Canadian raw natural gas production is relatively stable at ~18 Bcf/d. Recent drilling accounts for ~10 Bcf/d of which the Montney dominates at almost 5 Bcf/d Due to the high proportion of new wells the base decline is increasing and we forecast a requirement to make up ~3.8Bcf/d in 2016 in order to stay flat. Advances in completion technology has led to better wells. As a result drilling at or just below 2015 levels is likely sufficient to maintain total production.» Canadian Bitumen and Oil production is currently 3.9MMBbl/d which is up 1.3 MMbbl/d since 2008. Effectively all growth has come from Bitumen, most of which is from SAGD as opposed to Mining. Non Bitumen production has held relatively stable at ~1.5 MMBbl/d until recently on the back of the HZ multistage revolution and heated drilling activity from 2010 to 2014. 2015 saw a roughly 50% drop in oil wells drilled and a roughly 200Mbbl/d drop in production along with it. Barring a return to 2013/2014 drilling levels, Oil production is likely to continue declining. Even with very limited Oil development, overall Bitumen + Oil production is likely to continue growth as numerous Bitumen projects currently under construction ramp up over the coming years. 37

» Staff at McDaniel. (Eric Struyk, Mary Hansen, Heather Keohane)» Data Providers:» Software Providers: 38