Creating Clarity and Certainty for Shale Gas Development

Creating Clarity and Certainty for Shale Gas Development May 17, 2012 A British Columbia Example Shad Watts – Community Consultation & Regulatory Affairs Nexen NEBC Shale Gas

Shale Gas Case Study Agenda • Nexen NEBC Shale Gas Overview and Challenges Opportunities to Create Certainty and Clarity • Tenure Acquisition • Fiscal Incentives • Effective & Efficient Regulation

Nexen Ownership Summary ~172,000 acres in Horn River and Cordova ~128,000 acres in Liard 60% working interest 100% operated Ownership in Cabin Gas Plant Shale Gas Overview Northeast British Columbia Nexen Asset Positioning Takeaway Capacity • Spectra Plant • 100 MMcf/d • Cabin Gas Plant • 5% Nexen WI in Phase 1 • 400 MMcf/d gross processing capacity • Expected online mid-2012 • 20% Nexen WI in Phase 2 • 400 MMcf/d gross processing capacity NEBC Shales (Horn River: 104 Tcfe) BRITISH COLUMBIA Horn River Muskwa Potential LNG Facility BRITISH COLUMBIA/ALBERTA Montney Montney: 55 Tcfe Horn River Basin: Top Quartile Shale Play in North America Third largest resource play in North America 500 net foot interval averages 50% thicker than the Barnett High silica content shale is very brittle and fracable 10+ year land tenure with minimal drilling required to hold Attractive tax regime and royalty structure Competitive resource recovery (EUR) with 6 – 15 Bcf wells Viable North American LNG export option Ideally located to supply growing oil sands demand Cordova Embayment extends platform WILLISTONBASIN Bakken MICHIGANBASIN Antrim Utica BIG HORNBASIN Mowry UINTABASIN Baxter Mancos Marcellus Shale: 197 Tcfe PICEANCEBASIN SAN JOAQUINBASIN McClure APPALACHIANBASIN Marcellus Huron ARKOMA/ARDMORE BASIN Fayetteville Woodford Caney PARADOXBASIN Cane Creek Woodford Shale: 12 Tcfe Fayetteville Shale: 26 Tcfe SANTA MARIABASINMonterey SAN JUANBASIN Mancos Lewis DELAWARE BASIN Barnett Woodford BLACK WARRIOR BASIN Floyd Conasuaga Neal North American Unconventional Resource Plays Barnett Shale: 61 Tcfe Haynesville Shale: 140 Tcfe Eagle Ford Shale: 10 Tcfe ____________________ Resource Potential Estimate Source: Wood Mackenzie. 2

Shale Gas Overview Northeast British Columbia

STAGES OF SHALE GAS EXPLORATION AND DEVELOPMENT • A stepwise approach through exploration and appraisal… • Technical feasible – defining and characterising the a viable play concept; • Commercial feasiblity – cracking the nut leading to cost effective reservoir productivity; • Commercial demonstration through pilot programs prior to project sanction 30+

Development Requirements NEBC 1. Permanent Roads and year round access. 2. Well pads with many (8-20) horizontal wells One pad per 3 square miles. Triple Drill Rigs (5000m); self moving Surface footprint only 5-10% of traditional equivalent vertical well development Innovative application of technology to reduce development costs. 3. Completion (fracing) of Horizontal Wells. 16-20 fracs per well. 3+ fracs per day. exclusively slick water* fracs . typically 200-350 tonnes sand per frac (2-4 railcars). 4. Appropriate pipelines to and from the well pads Shale Gas Overview *Slickwater or slick water fracturing is a method or system of hydro-fracturing which involves pumping water & sand with a friction reducer. 6

5. In field Facilities / Gas Compression Dehydrate and compress gas Formation water filtration & disposal Takeaway pipeline to Area Gas Plant(s) 7. Area Gas Plants that will further process the gas Remove CO2 and trace H2S Compress to sales pipeline pressures 8. Sales pipeline to transport gas to market Shale Gas Overview Development Requirements NEBC 7

Shale Gas Overview Horn River Basin – Drilling (18 well pad) b-77-H/94-O-8 Pad 2011

Shale Gas Overview Horn River Basin – Completions (9 well pad) c-1-J/94-O-8 Pad 2011

Shale Gas Overview Development Challenges NEBC • Distance to market • Undeveloped local service sector / distance to services • Lack of infrastructure and difficult surface access • Understanding the reservoir • Long time before positive return

Shale Gas Overview Development Challenges NEBC Large upfront capital requirements Drilling = $127,687/day Completions = $640,693/day (excluding materials)

Shale Gas Overview THE SHALE GAS DEVELOPMENT CHALLENGE Deliverability and EUR for each well ? How much is it going to cost ? What to put on the books ? How much infrastructure and when to expand ? How to reliably assess to services? Market contracts and takeaway capacity ? How to get the most gas using the least frac water & proppant ? Best flowback practices to enhance performance ? What is the best well spacing, length & orientation ? How many frac stages & how far apart ? Where should laterals be placed ? How much free & absorbed gas ? Is there a sweet spot in the reservoir ? Planar bi-wing or complex fracs ? How important are natural Fractures ?

Shale Gas Overview Key Messages – What It Takes Quantitative – Below Ground • Positive expected monetary values  Cumulative distribution of NPV that incorporates mitigation decision points and key subsurface risk and uncertainty ranges • Acceptable risked capital levels • Attractive success case valuation Qualitative – Above Ground • Favorable fiscal terms and incentives that promote exploration and risk sharing • Terms of tenure aligned with the “unconventional” timelines for exploration, appraisal and development • Sanctity of contract • Stable, streamlined, open and transparent regulatory structure • Infrastructure to customer • Liberalized gas market • Political stability • Secure and predictable operating environment • Legitimate government consultation on regulation, terms and policy

Oil & Gas Tenure Certainty in Subsurface Rights • Tenure Must Facilitate Responsible Development: • Should stimulate work activity rather than be viewed as a revenue generation mechanism • Clear definition of exclusive rights geographically • Appropriate to resource developed in the term, and geographical extent • Risk sharing through flexibility in commitments for work or cash in lieu with optionality for staged commitments related to market. • Maintains competitiveness through market pricing with no minimum bids but don't have to award if less than fair award price

Certainty in Subsurface Rights Oil & Gas Tenure Principles of British Columbia’s Tenure System • Exploratory effort is rewarded with the right to produce, delineation of a pool allows the tenure to be held beyond the end of its term • Longer tenures are granted in areas with poorer infrastructure • Oil and gas tenure grants the rights to the resource only - permitting of exploration and development activities is managed separately by an independent agency • Unused rights return to the Crown at the end of the tenure term

Tenure Types in BC Certainty in Subsurface Rights • Drilling Licences (3, 4, or 5yr term) • Exploration type of tenure • Different terms depending on location • Encourages Development • Leases (5 or 10yr term) • Production form of tenure • Held in perpetuity

Shale Gas Case Study A SUCCESSFUL FISCAL REGIME • Fiscal regime that shares risk / incents activity • Provides long term certainty • Enable accelerated capital cost recovery for capital intensive plays • Facilitate resource development through access cost sharing in remote areas (roads and pipe) • Incent zone specific production through target credits • Recognize seasonal or operational constraints

Fiscal Incentives BC’s Targeted Royalty Programs

Fiscal Incentives Impact of BC Royalty Programs • $1.3 billion in incremental royalties since 2004/05 • 21% increase in BC’s natural gas revenues

Efficient and Effective Regulation • Considers Operational requirements, risk, and technical considerations • Built collaboratively • Flexible • Approvals received in a timely manner • Incent desired practices • Results based – focus on compliance

Effective & Efficient Regulation Provincial Legislative Framework • Government and Ministries • Set Policy and Legislation • Award Tenure • Industry • Develops • Projects E.g. Oil and Gas Activities Act • Oil and Gas Commission • Provides Permits & Approvals • Compliance & Enforcement E.g. Drilling and Production Regulation

Effective & Efficient Regulation Specified Enactments One Window Approach Land Act: Section 14 Temporary Occupation of Crown Land Section 39 Licence of Occupation Section 40 Right of Way The BC Oil and Gas Commission serves as a “single window” agency provided with legislative authority for authorizations under several Acts. Water Act: Section 8 Short Term Use of Water Section 9 Changes in and About a Stream Section 26 Permits over Crown Land Forest Act: Section 47 Master Licence to Cut Section 117 Road Use Permit Other Enactments: Section 12 Heritage Conservation Act Sections 9, 14 & 15 Environmental Management Act

Effective & Efficient Regulation Structure of OGAA • Oil and Gas Activities Act (OGAA) • More efficient approvals for multiple related activities • Increased compliance and enforcement mechanisms • Increased landowner/stakeholder support • Increased environmental protections • New appeal provisions • Maintains specified enactments Geophysical Exploration Regulation Regulatory Framework Regulatory Framework Drilling & Production Regulation Pipeline Regulation Administrative Penalties Regulation Consultation and Notification Regulation Environmental Protection & Mgmt Regulation

Effective & Efficient Regulation Project Lifecycle – What the Commission Regulates One Window Approach • 1. Pre-Application • Consultation/Engagement by Industry with landowners, other stakeholders/First Nations and Government/Commission • Abandonment / Reclamation • Certificate of Restoration Process • Orphan Fund • Operations • Risk based inspections • Compliance Programs and Audits • 2. Application • First Nations Consultations • Application Review • 5. Leave to Open/Production • Review project to ensure it is compliant and ready to commence operations • 3. Decision (21 days) • Permit issued or declined with reasons • Conditions attached as appropriate • Construction • Inspections and Enforcement

Effective & Efficient Regulation Streamlined Application

Effective & Efficient Regulation Environmental Protection Horizontal Wells Vertical Wells • 20 Horizontal wells from one 260x175m pad • Each frac stage in hz well is equivalent to a vert. well • Would need 320 vertical wells • Vertical wells each on a separate 100m x 100m pad • Same amount reservoir contacted in both scenarios • 85% less surface disturbance

2000 meters Effective & Efficient Regulation Environmental Protection Small Lake Complexes • Collaborative effort bw industry and government • Calf mortality decreases when selected • Calf recruitment success increases • Predators are avoiding/don’t select Lakes 1 ha – 10 ha within 200m proximity of each other 250m buffer applied

Effective & Efficient Regulation Water uses – Shale Gas What is Water Used For? Oil and Gas Road and well pad construction Drilling Well completions Transportation/pipelines

Water requirements Nexen Horn River Basin: 1 pad per year 16-18 frac stages per well, 20 wells per pad Frac design: 3300 m3 per frac stage and drill-outs 60,000 m3 per well x 20 wells per pad 200-350 tonnesfrac sand per frac Total annual requirement of ~1,200,000 m3 of water & 80,000 – 140,000 tonnes of sand Effective & Efficient Regulation 32

Water Protection - Well Construction Effective & Efficient Regulation Potable Groundwater Aquifers Potable Water Wells: <150-300 metres Surface casing Additional steel casing and cement to protect groundwater Protective Steel Casing Hydraulically fractured shales Approximately 2500 metres below surface

Licensed Withdrawal Effective & Efficient Regulation • Variable withdrawal rates are designed to mimic seasonal variations in flow 34

Conclusions Capital Intensive Development Governments and industry need to work together Different phases of development need to be recognized Focus on results based regulatory framework to enhance efficiency and flexibility

Creating Clarity and Certainty for Shale Gas Development