2014 NCDEX Guar Conferenceguarinternational.com/presentation/2ndsession/PACWESTNCDEX Guar...NCDEX...

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Oilfield Guar Demand Outlook & Trends

October 2014

2014 NCDEX Guar Conference

Client Confidential © PacWest 2014 | All rights reserved | 2

NCDEX Guar Conference

Agenda

1. Introduction 2. Executive Summary 3. Oilfield Activity Trends 4. Guar Consumption Trends 5. Rest-of-World Guar Outlook 6. Questions & Answers



■ Provide strategy consulting and advisory services to energy, industrial, and resources clients

■ Strength in the oilfield supply market - Often work with E&Ps or suppliers

across range of industries that supply products/services to it

■ Generally work at C-Level or

business lead level

PacWest Overview & Capabilities

PacWest is a boutique strategy consultancy and market intel firm specializing in energy, industrial, resources; strength in the oilfield

■ Offer industry-leading, granular analysis of the oilfield

■ Deep knowledge and strength in the pressure pumping / frac market

■ Employ combination of primary intelligence + secondary research

■ Unique in market: apply strategy consulting capabilities to turn research into actionable intelligence

Market Intelligence Products Consulting & Advisory

All key staff come from top-tier strategy firms; consulting and market intelligence capabilities reinforce/inform each other



PacWest Market Intelligence Product Offerings

PacWest currently offers a range of oilfield market intelligence products to support subscriber decision-making

Detailed analysis and forecast of global frac services market, including regional breakdown of supply, demand, utilization, pricing, as well as market, technical, and technology trends Monitors and forecasts frac demand, supply, utilization, trends, drivers, and constraints across key Chinese frac markets Stripped-down version of PumpingIQ: regional frac fleet/capacity counts, by pumper, and other key data points from PumpingIQ Detailed operational profiles of 100+ critical unconventional suppliers, hosted in an interactive online database

Cost escalation forecasts for 10 major D&C categories, for 4 years into the future

Play-by-play forecasts of NAM rig counts, well completions, wells frac’ed, and frac stages, for 3 years in the future Analysis of US oilfield water management market, including regional supply, demand, pricing, trends for sourcing, logistics, drill/frac, flowback, treatment, disposal service Analysis/forecast of US proppant supply, demand, and pricing, by play and proppant type (sand, resin-coated sand, ceramics); regional pricing indices to be included in future releases In-depth analysis of stimulation chemicals market, including a market overview report and deep-dive reports on 10 key chemical categories (e.g. guar, crosslinker, friction reducer, etc.) Frac database including location, operator, pumper, chemicals, suppliers, and more, for over 100,000 wells in North America

Product Description



Select Subscription & Consulting Clients

We work with many leading upstream oil/gas players in the unconventional space

E&P Chemicals OFS Financial




Agenda



■ Oilfield demand for guar is expected to grow moderately over the next two years - Growth in wells frac’ed forecast to be around 8% globally; 5% growth in the US, and up to 23% elsewhere - All key metrics for guar consumption (# of wells, % of wells, mass/well) have increased since 2011, driving

market growth

■ Trends in the US land market such as the increase in slickwater fracs and on-site blending could have an impact on demand growth forecasts - 10% growth per annum in gelling agent consumption is expected across US land through 2016 - Recent shift to slickwater fracs (primarily water and friction reducer), which requires on average less guar

per stage than other gel-based fracs could impact guar demand if they accelerate - A shift in pumper purchasing and guar powder vs. slurry preferences (7x increase since 2010) erodes the

blender business - Prices forecast to recovery only slightly over the next few years

■ Future guar demand growth dependent on growing demand in rest-of-world - No significant spikes in demand are expected in NAM over the next 2-3 years - The growth of unconventional outside of NAM, particularly liquids plays, has the potential to significantly

increase opportunities for guar consumption (e.g., China, Argentina, Russia)

■ Global demand is not likely to be affected by the emergence of substitutes - Estimate that substitutes account for <5% market share in NAM, and less than 1% in RoW - These are currently much more expensive to produce, and are not expected to capture a notable share of

the market in the near future - While these create a price ceiling of sorts, guar prices are not expected to reach that level in the near term

Executive Summary

Oilfield guar demand is expected to grow moderately in the next two years; however, emerging oilfield trends could dampen forecasts



■ Reflects consumption in the field ■ Accounts for actual jobs pumped and guar

pumped downhole by operators and/or pumpers

■ Measures guar mass regardless of origin ■ Focuses on chemical properties and benefits

of guar usage in hydraulic frac’ing ■ Estimates guar demand based on frac’ing

activity and past trends in the oil and gas industry

Consumption vs. Demand

Note that our analysis focuses on actual consumption in the field, not demand for guar powder from Indian suppliers

Sources: PacWest analysis

■ Demand for powder by oilfield field services companies - Oilfield chemicals suppliers - Pressure pumpers / hydraulic fracturing services

providers ■ Represents purchases from India guar

producers and traders ■ Accounts for guar used and guar stored ■ Tracks relationship with supply closely and

identifies response from decentralized agricultural production centers as guar production becomes more profitable than other crops

Demand Consumption

The differences between consumption and demand leads to some timing issues in correlating guar pumped and actual purchases




Agenda



Forecast ■ Global number of wells frac’ed is expected to increase by 36% from 2011 to 2016 - Represents 6% CAGR

■ Markets outside the US are expected to grow between 1.6x and 4.7x faster than the US between 2014 and 2016

■ China growth has slowed, though the country still leads international additions and overtook Canada as second largest frac market in the world in 2013 (by capacity)

Global Wells Frac’ed (2011-2016)

Sources: PacWest analysis Notes: “Other” includes Euro Land, Argentina, Australia, Mexico, Other Latin America, Other Africa, Other Asia, MENA, Offshore

Comments Wells Frac’ed

24,148 28,841 29,313 29,113 30,620 32,022

6,272 6,669 6,956 6,700 7,727 8,724

5,172

6,337 7,480 8,926 10,166

10,371

9,400

9,058 6,925 6,694 6,256

6,152

1,321

2,032 2,649 3,710 4,651

5,622

46,314 52,937 53,324 55,143

59,420 62,891

0

30,000

60,000

90,000

2011 2012 2013 2014 2015 2016

US Canada China Russia Other

North America will account for 49% of global frac activity at year-end 2014; but most growth in wells frac’ed through 2016 will be elsewhere



Forecast

231 315

378 436

509 574

59

80

95 106

126

152

7

11

19

18

22

25

11

13

12

15

17

19

310

422 511

585

692

799

0

200

400

600

800

1,000

2011 2012 2013 2014 2015 2016

US Canada China Russia Other

■ North America’s share of global stages frac’ed is expected to decrease from 75% in 2011 to 71% in 2016

■ Global number of frac stages is expected to increase by 158% from 2011 to 2016, lead by a sharp increase in number of wells frac’ed and drastic efficiency improvements - CAGR of 16% from 2013 to

2016

Global Stages Frac’ed (2011-2016)

Sources: PacWest analysis Notes: “Other” includes Euro Land, Argentina, Australia, Mexico, Other Latin America, Other Africa, Other Asia, MENA, Offshore

Comments Stages Frac’ed (in ‘000 stages)

However, most growth in stages frac’ed comes from North American markets, driven by increased stage intensity and operational efficiency



Forecast

US Land Activity Summary

Total wells frac’ed will remain flat in 2014 while frac stages are expected to increase by 15% as the shift to HZ wells continues

Sources: PacWest analysis; RigData

Comments Wells Frac’ed, Frac Stages, Wells Spud

Metric Percent Change (%)

2013∆ 2014∆ 2015∆ 2016∆ Wells Spud -2% +6% +2% +3% Wells Frac’ed +2% -1% +5% +5% HZ Wells Frac’ed +15% +11% +13% +10% Frac Stages +20% +15% +17% +13% HZ Frac Stages 28% 20% 19% 14%

■ The US Land market continues to shift to HZ

■ Total wells frac’ed expected to increase by 3% per annum through 2016, driven by an 11% per annum increase in HZ wells frac’ed

■ Total wells frac’ed are forecast to decrease by 1% in 2014, due to a significant decreases D&C activity directed towards VT/DR wells

■ Frac stages expected to increase by 15% per annum between 2013 and 2016

24.1 28.8 29.3 29.1 30.6 32.0

0

100

200

300

400

500

600

700

0

5

10

15

20

25

30

35

40

45

2011 2012 2013 2014 2015 2016

Frac

Sta

ges

(‘000

s)

Wel

ls (‘

000s

)

HZ Wells Frac'ed VT/DR Wells Frac'ed Spuds Frac Stages



Forecast

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3Sp

uds (

’000

)

Rig

Coun

t

HZ Rigs VT/DR Rigs Total SpudsHZ Spuds VT/DR Spuds

Comments Wells Spud (’000s) vs. Rig Count US Land Rig Count & Well Spuds

US Land spud growth expected to continue outpacing rig growth through 2016, driven by increased drilling efficiency metrics

■ Anticipate incremental growth in total US Land rig count through 2016 - Growth is led by robust growth in HZ

activity, with HZ rigs expected to increase 12% in 2014

- As efficiencies increase, we expect HZ rig growth to slow to 4% in 2015 and 3% in 2016

■ Due to increased multi-well pad penetration and other technology improvements, the number of spuds per HZ rig continues to increase across all major US plays, from a US Land average of 13.4 in 2011 to 15.6 in 2013 to 18.1 in 2016


2014∆ 2015∆ 2016∆ Rigs +5% -1% +0% HZ Rigs +12% +4% +3% Spuds +6% +2% +3% HZ Spuds +17% +11% +8%




Forecast

2

3

4

5

6

7

8

9

12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3Total HZ VT/DR

Comments Wells Frac’ed (‘000s) US Land Wells Frac’ed

Strong growth in D&C CapEx expected through 2016, driving robust horizontal frac activity

■ Increased capital budgets, lower well costs, improved efficiencies, and improved D&C techniques contribute to long-term growth in wells frac’ed

■ The proportion of HZ wells frac’ed increased to 56% in 2013, and we expect the share to increase to 62% and 66% of wells by 2014 and 2015, respectively

■ The number of VT/DR wells frac’ed will significantly decrease 15% year-on-year - As E&Ps continue to achieve strong

production results from HZ frac activity, we foresee continued decline in vertical activity through 2016


2013∆ 2014∆ 2015∆ 2016∆ Total +2% -1% +5% +5% HZ +15% +11% +13% +10% VT/DR -11% -15% -7% -5%




Forecast

0

25

50

75

100

125

150

175

12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3Total HZ VT/DR

Comments Frac Stages (‘000s) US Land Frac Stages

Stage count is expected to increase by 15% in 2014, driven by an increase in HZ wells frac’ed, shorter stages, and lateral length increases


■ Frac stages will continue to increase in the US Land market due to an increased number of HZ wells and two key technical trends: - Shortening stage widths in many

developing and mature plays (e.g. Marcellus, Eagle Ford, Bakken, etc.)

- Increasing lateral length and stage width optimization in many developing plays (e.g. Permian, DJ Basin, Utica, etc.)


2013∆ 2014∆ 2015∆ 2016∆ Total +20% +15% +17% +13% HZ +28% +20% +19% +14% VT/DR -13% -16% -5% -4%



US Land Multi-Well Pad Drilling Penetration (HZ wells)

Multi-well pad penetration, an indicator of the efficiency of both drilling and frac operations, continues to climb in US Land

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% 12H2 13H1 13H2 14H1

Notes: Methodology has been revised from previous WellIQ releases. The well population for each quarter includes only active pads, i.e. pads in which 1 or more wells were drilled in that quarter. Any pad that includes 2 or more wells, regardless of the time period in which earlier wells were drilled, qualifies as a multi-well pad. All wells within 400 feet of each other are classified as being on the same pad.

Sources: PacWest analysis; Rig Data



The DJ Basin, Permian, and Utica will lead HZ frac growth in 2014; the Eagle Ford, Bakken, and Permian account for majority of activity

Sources: PacWest analysis Notes: Haynesville and Eagle Ford are grouped with Brown Dense and Woodbine, respectively.

<-40% -30% to -40% -20% to -30% -10% to -20% -5% to -10% 0% to -5% 0% to +5% +5% to +10% +10% to +20% +20% to +30% +30% to +40% >+40%

BAKKEN

MARCELLUS

UTICA

PERMIAN

EAGLE FORD / WOODBINE

HAYNESVILE / BROWN DENSE

DJ BASIN

MISSISSIPPIAN

UINTA

PICEANCE

FAYETTEVILLE

BARNETT

ANADARKO WOODFORD / SCOOP

CALIFORNIA

US Land Heat Map: Growth in HZ Wells Frac’ed (2013 vs. 2014)

GREEN RIVER

MIDCON SANDS



Stimulation Chemical Fluid System Definitions

There are a range of stimulation chemistry fluid systems employed during fracturing, with major implications for guar consumption


System Type Definition Guar

Usage

Slickwater (SW) Employs a friction reducer in order to transport proppant into a hydraulic fracture 1

Linear Gel (LG) Employs a gelling agent in order to transport proppant into a hydraulic fracture 4

Crosslinked (XL) Employs a gelling agent and one or more crosslinkers in order to transport proppant into a hydraulic fracture 4

Hybrid LG/SW Employs a combination of a friction reducer and gelling agent in order to transport proppant into a hydraulic fracture 2

Hybrid XL/SW Employs a combination of a friction reducer, gelling agent, and one or more crosslinkers in order to transport proppant into a hydraulic fracture

2

Energized Incorporates an energizer, normally nitrogen or carbon dioxide, into the base fluid in order to generate foam that transports proppant into a hydraulic fracture

0

Other/Unknown Includes the following treatment types: Acid Frac, Gas Frac, Matrix Acidizing; also includes records for which a classification was unknown or unavailable, generally due to incomplete data

0

High Legend: 0 1 2 3 4 Low



Eagle Ford, Bakken, and Permian are leading uses of XL chemistry which drives highest guar consumption

26%

11% 58%

5%

Eagle Ford 43%

13%

37%

6%

Permian

6%

22%

70%

DJ Basin

19%

41% 3% 12%

25%

Anadarko

26%

2%

69%

Bakken

34%

2% 24%

40%

Marcellus/Utica

Legend:

14%

26%

45%

14%

Total US

Sources: PacWest analysis; PacWest FracDB / FracFocus.org

Note: “other/unknown” frac types excluded from figures above, including acid frac, matrix acidizing, LPG frac. This category also includes records for which a classification was unknown or unavailable, generally due to incomplete data

US Frac Type in Key Plays (2013)




Agenda



Map of Regional Gelling Agent Consumption (2013)

We estimate that more than 711 MM pounds of guar was consumed in the US Land market in 2013 during well stimulation

Haynesville 20.2 MM lbs

Fayetteville 0.6 MM lbs

DJ Basin 47.4 MM lbs

Bakken 110.5 MM lbs

Appalachia 22.7 MM lbs

Barnett 6.18 MM lbs

Eagle Ford 312.0 MM lbs

Permian 127.2 MM lbs

Anadarko 36.9 MM lbs

US Aggregate 711.1 MM lbs

Other U.S. 21.8 MM lbs

Sources: PacWest analysis, PacWest FracDB, FracFocus.org

Uinta 5.4 MM lbs

Piceance 0.27 MM lbs



Forecast ■ Gelling agents are roughly 95% guar/derivative

■ We forecast that by 2014 the market will have increased by 27% per annum since 2011

■ All key metrics for guar consumption (# of wells, % of wells, mass/well) have increased since 2011, driving market growth

US Land Gelling Agent Consumption

Demand growth for gelling agents through 2016 is forecast to slow to an average 11% per annum, from 33% between 2011 and 2013


Comments Gelling Agent Consumption (MM lbs)

400 558

711 816

904 984

0

200

400

600

800

1,000

1,200

1,400

2011 2012 2013 2014 2015 2016

Year Percent Δ 2012 39% 2013 27% 2014 15% 2015 15% 2016 9%



■ On average, oil & liquid plays consume more guar per HZ well than gas plays

■ Increased guar consumption per well is correlated with an increase in stage length

■ These increases over time have driven overall guar demand growth in the US

Regional Gelling Agent Consumption Per Well

Geological differences in plays drive differences in frac chemistry selection and subsequent gelling agent usage between regions


Comments Average Gelling Agent Consumption per HZ Well (‘000 lbs)

47

30

28

54

40

28

25

46

37

27

28

45

0 20 40 60 80

Land US

Mixed

Gas

Oil / Liquids

2011

2012

2013



Forecast ■ The vast majority of gelling agent consumption is generated by oil/liquids plays; these have also been the areas with the highest growth in activity and gelling agent consumption

■ This results from the fact that consumption per well of guar is significantly higher in oil/liquids plays, while oil-focused activity accounts for the majority of activity and growth in NAM today, given low gas price environment

Oil vs. Gas Play Gelling Agent Consumption Trends


Comments Gelling Agent Consumption (MM lbs)

117 175

239 241 299

335 348 385 401 407 435 437

171

229

289 269

339 372 388

428 448 456

490 494

0

50

100

150

200

250

300

350

400

450

500

550

11H1 11H2 12H1 12H2 13H1 13H2 14H1 14H2 15H1 15H2 16H1 16H2

Oil/Liquids Plays Gas Plays Mixed Plays

Activity in oil/liquids plays accounts for the vast majority of guar consumption



Shift in US Oilfield Guar Flow

Underlying guar demand growth is a shift in pumper purchasing and powder v. slurry preferences; eroding the slurry blender business

Legend = Powder = Slurry = Splits

2010

Split Processor

Gum Producer

Oilfield Chemical/

Blender Pumper

E&P

90% 10%

5% 95%

2013

Split Processor

Gum Producer

Oilfield Chemical/

Blender Pumper

E&P

60% 40%

35% 65%

■ Since 2012, pumpers have increased share of guar powder purchased directly Indian producers

■ Of powder procured by pumpers, a portion is given to blenders to blend into slurry, while the balance is blended into slurry on-site (35% of volume in 2013) - Share of on-site

blending has increased significantly, cutting into slurry demand

Comments




■ During peak guar pricing, nearly every major oilfield services company invested R&D into the development of guar substitutes, based on several different commodities: - CMC (Carboxymethyl Cellulose) - Xanthan gum (generally used in combination with guar)

■ Several of these developments resulted in notable commercial products: - Halliburton’s PermStim (Xanthan gum based) - Baker Hughes’ AquaPerm - FTS’ Diamond - Santrol’s self-suspending proppant (SSP): utilizes a combination synthetic and organic gelling

agent that is coated onto proppant to eliminate separate gelling agent; interesting technology but still early stage and current production capacity is extremely limited

■ Given higher price of substitutes compared to current guar prices and limited evidence of production enhancement, adoption has been limited - Generally higher priced and in current guar price range, not cost competitive: price range =

~$3.50-5.00/lb (~$7.50-11.00/MT) - Little technical evidence to indicate that any substitutes enhance production, despite some

marketing claims of a “cleaner break”

Guar Substitute Trends

Guar substitute development was driven by 2011 price spike, but adoption to-date has been extremely limited




Guar Powder vs. Substitute Price Trends

Assuming guar prices remain relatively stable, do not expect meaningful adoption of substitutes

Sources: PacWest analysis, NCDEX data Note: Prices represent average annual purchase price by oilfield chemicals players and pressure pumpers from powder producers in India

Oilfield Guar Powder Prices ($/lb) Comments

■ Given current supply/demand dynamics, price forecasts are well below the ceiling created by substitutes ($3.50-5.00/lb)

■ Assuming price increases remain stable, no compelling reason to shift to substitutes

■ Additionally, the supply base for substitutes is not as robust as it is for guar, so providers of substitutes would struggle to keep up with demand if many of them attempted to scale rapidly

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

2008 2009 2010 2011 2012 2013 2014

Price Ceiling from Guar Substitutes



Comments Frac Type Trends ■ SW fracs forecast to

increase 6% through 2016 - Guar-heavy Crosslinked/

Linear Gel forecast to fall by 22% in the same period

■ Trend primarily driven by increased SW usage in Appalachia, Eagle Ford, and Permian

■ Some E&Ps have reportedly achieved similar production results using only slickwater without the added costs of using a gelling agent

Shift to Slickwater Fracs

An emerging shift to slickwater frac chemistry in key oil/liquids plays represents a more immediate risk to guar consumption

Source: PacWest analysis; PacWest FracDB / FracFocus.org

72% 72% 73% 73% 74% 75% 76% 76% 76% 77% 77% 77%

27% 23% 25% 24% 23% 22% 22% 22% 21% 21% 21% 21%

1% 4% 3% 2% 3% 3% 3% 3% 3% 3% 3% 3%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4

SW & Hybrid XL & LG Other




Agenda



Global Fracturing Capacity (year-end 2014)

Argentina HHP 430,250

Mexico HHP 270,200

Euro Land HHP 300,000

China HHP 2,640,700

Australia HHP 157,000

Russia HHP 1,100,000

MENA HHP 682,000

Offshore HHP 900,000

Other HHP 450,000

Sources: PacWest analysis; company reports; industry sources

Canada HHP 2,138,200

US HHP 18,003,950

NAM Aggregate HHP 20,142,150

Global Aggregate HHP 27,072,300

Global hydraulic fracturing capacity will total 27 million HHP at year-end 2014, with North America accounting for 74%



■ North American shale activity accounts for overwhelming majority of guar demand

■ Expected activity increases in non-NAM markets will continue to drive global guar demand over next 5+ years - Biggest emerging player is China

2013 Global Guar Consumption, by Region

North America makes up 85%+ of oilfield guar demand; future guar growth dependent on growing demand in rest-of-world

Comments Consumption of Guar (‘000 MTs)

711

238

66 34 26

USCanadaRussiaChinaRoW

Region % Market Share US 66%

Canada 22% Russia 6% China 3%

Rest of World 2%


1,076,000 MTs



International Unconventional Potential Assessment

Given current market structures, we believe that MENA & China have the most promising development factors of any international markets


Dimension KSA Oman Australia Russia Argentina China Tight

China Shale Euro Land Mexico Brazil Colombia

Geology 3 3 3 2 4 3 3 1 3 2 2

Commerciality 3 2 2 3 3 3 3 4 2 2 2

OFS capacity 3 2 1 3 2 2 1 2 2 2 2 Financial structure 3 2 2 3 1 2 3 2 3 2 3

E&P landscape 1 2 2 1 3 1 2 2 2 2 3 Regulatory landscape 2 3 3 1 1 3 3 1 3 2 3

Infrastructure 2 2 2 2 1 3 2 1 2 1 1 Development constraints 3 3 3 2 1 3 2 1 2 2 2 Weighted Score 2.6 2.4 2.3 2.2 2.3 2.6 2.4 1.8 2.4 1.9 2.2


Note: Current Mexico score does not take into account the potential success of political reform. Meaningful reform would increase its score to 2.5. Scoring weights the dimensions as follows: Geology 25%, Commerciality 15%, OFS Capacity 15%, Financial Structure 10%, E&P Landscape 10%, Regulatory Landscape 10%, Infrastructure 10%, Development Constraints 10%; weighted score is calculated by averaging Harvey ball scores (0 to 4)



Forecast ■ Global growth is strongly driven by the US and Canada, accounting for respectively 66% and 22% of global demand in 2013

■ China is experiencing strong year on year growth, with 25.3% CAGR from 2011 to 2016

Global Guar Consumption

Global demand for oilfield guar is expected to triple between 2011 and 2016; strong growth is driven by the US, Canada and China


Comments Guar Consumption (MM MT)

610 845

1,076 1,255

1,461 1,687

0

400

800

1,200

1,600

2,000

2,400

2011 2012 2013 2014 2015 2016

USA Canada Russia China

Other Argentina Australia MENA

Offshore Mexico Euro Land

Year Percent Δ 2012 39% 2013 27% 2014 17% 2015 16% 2016 15%



Forecast ■ China forecast to be the largest driver of guar demand growth in the coming years

■ Russia growth expected to be stable but recent political issues will slow tight oil progress

■ Argentina also expected to exhibit healthy growth, along with MENA

Rest-of-World Guar Consumption

Rest of world guar demand growth will be driven by China and Russia, with potential for other countries to be major contributors


Comments Guar Consumption (MM MT)

71 91

115 136

176

220

0

50

100

150

200

250

300

2011 2012 2013 2014 2015 2016Russia China Other Argentina Australia

MENA Offshore Mexico Euro Land

Year Percent Δ 2012 28% 2013 27% 2014 19% 2015 29% 2016 25%



International Unconventional Potential Assessment

Given their oil/liquids play potential (vs. gas) China, Argentina, and Russia should be the focus as guar demand drivers


Dimension Russia Argentina China Tight China Shale

Geology 2 4 3 3 Commerciality 3 3 3 3 OFS capacity 3 2 2 1 Financial structure 3 1 2 3 E&P landscape 1 3 1 2 Regulatory landscape 1 1 3 3 Infrastructure 2 1 3 2 Development constraints 2 1 3 2 Weighted Score 2.2 2.3 2.6 2.4




■ CNPC/PTR anti-corruption campaign having a significant impact on the market; it has been the leading factor driving a decline in activity in 2014 YoY - Anti-corruption campaign has created uncertainty, reducing deployed upstream Capex - Wells drilled expected to decline 18% YoY, with Tarim and Ordos seeing sharp declines, while we forecast

wells and stages frac’ed to decline a more modest 8% and 6% YoY, respectively - Expect that anti-corruption campaign will be a positive for market long-term

■ Sichuan shale activity is major bright spot in market, with increasing wells frac’ed and production; expect 6.5 bcm production target for 2015 will be met, led by Sinopec’s Fuling play

■ Future shale success depends on proving geology along with cost reductions, price/subsidy reform implementation, and improving operations and technology - Initial success not withstanding, China’s shale geology is still largely unproven and in ‘data gathering’ phase - Shale well costs significantly higher than in US; many opportunities for cost reductions, including

operational improvements and revamped open bid process, similar to recent attempts in Changqing Oilfield ■ Expect frac capacity additions of just 0.2 MM HHP in 2014, down sharply from nearly 1.0 MM

HHP in 2013, a result of both the anti-corruption campaign and low utilization levels - Estimate 14H1 frac utilization of 52%; tight resources leading demand driver, though shale increasing - Expected limited capacity additions of 0.3 MM HHP in 2015, but expect utilization to tighten to 61% in 15H2 - Forecast frac capacity in 2018 will vary between 3.8 and 8.3 MM HHP, depending on how landscape evolves

■ Increasing LNG and pipeline imports and environmentally-challenged coal-to-gas actively creating a more competitive gas supply landscape

China Activity & Trends Summary

Anti-corruption efforts have slowed activity but expect progress to continue; most shale geology remains a major question mark, however



China geology is expansive and diverse, but represents large potential for unconventional activity and guar demand China Oil/Gas Regions




2.2 3.8

5.2 6.2 5.4 5.2 5.9

7.0 2.2

2.5

3.5 3.6

3.5 3.4 3.8

5.1

4.5

6.3

8.8 9.8

8.9 8.7 9.7

12.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

12H1 12H2 13H1 13H2 14H1 14H2 15H1 15H2

HZ VT/DR

Forecast

China Stages Frac’ed, by Trajectory (2012-2015)

As frac stages per HZ well steadily increases, HZ wells continue to account for an increasing share of stages frac’ed

Sources: PacWest analysis; industry sources

■ Annual stage count expected to drop 10% in 2014, primarily due to well count decrease

■ Due to a much higher number of stages frac’ed per well, HZ wells account for the majority of stages frac’ed - In the Ordos Basin, average VT well has less

than 2 stages, while an average HZ has ~9 ■ While VT/DR stages per well have increased,

they still tend to average less than 2 stages per well

■ HZ stages per well have been rising as E&Ps gain confidence in their ability to frac longer laterals - Most plays in 2013 have average HZ stage

counts of 5-8, up from 3-5 in 2011

Comments Onshore Stages Frac’ed ('000s)



■ Unconventional activity has increased over the past year, focused on the Vaca Muerta formation in Neuquén province; the Golfo San Jorge and Noroeste basins have seen only limited activity

■ Despite increasing interest from IOCs, several major hurdles remain to full-scale development: - Argentina’s recent default on its international debt will raise questions about foreign investment and YPF’s

access to capital - Customs delays, poor logistics/infrastructure, and significant labor issues remain major challenges - Though YPF has settled its post-nationalization dispute with Repsol, government policy, especially with

regard to the oil and gas industry, is still perceived as capricious; elections in 15H2 could cement or change this perception

■ YPF and aggregate market activity is still increasing, though not nearly as rapidly as many expected - We forecast 228 unconventional wells drilled in 2014; this is up from a forecast of 165 unconventional wells

drilled in our last projections made for our 13Q1 PumpingIQ release - The increase is due to both greater activity in the Vaca Muerta other basins

■ Despite uncertainty surrounding activity, logistics and policy, several frac players have intentions to increase capacity in the country - Current frac capacity stands at 430K HHP, with incremental additions expected in 14H2and 15H1 - We estimate 2014 frac equipment utilization rate of only 65% in our Base Case, decreasing to 58% in 2016,

due to capacity additions

Argentina Activity & Trends Summary

Activity in the Argentina has increased over 2013, but political and other “above-ground” issues hold back potential activity



Forecast

Vertical completions still account for the majority of frac activity, due to the thickness of the Vaca Muerta formation Argentina Unconventional Wells Frac’ed

73

156

218

265 298

339 380

0

100

200

300

400

500

2012 2013 2014 2015 2016 2017 2018

■ An estimated 156 unconventional wells were frac’ed in 2013

■ Approximately 95% of wells will be vertical completions throughout the period to 2018

■ Typical frac fleet size is about 25,000 HHP with 10-11 active pumps and 2 to 3 backup units the norm

■ Efficiency gains will be hard won with consumables supply continuing to be a bottleneck

■ Although oilfield services firms have announced large horsepower additions, it remains uncertain in many cases when the equipment will come into service due to customs and transportation issues

Unconventional Wells Frac’ed Comments

Sources: PacWest analysis; company reports; industry sources




Agenda



■ Aggregate demand of North American guar consumption

■ North America guar consumption by play and well type

■ Market size and forecast quarter-on-quarter growth by play

■ Guar consumption by system (native vs. derivative)

■ Pumper consumption and trends ■ Other relevant market trends

Overview of Chem IQ - Guar

suite offers analysis of play-by-play stimulation chemical trends, including demand, chemical profiles, and mass/well for fluids

■ North America import data analysis to match consumption and purchasing

■ International demand and emerging markets (China, Russia, Rest-of-World)

■ Detailed supply base analysis and forecast ■ Price trend analysis and forecast

Potential Future Scope Current Scope

If there is sufficient demand from customers, we will pursue the expanded product



3 Our Approach – Q&A Questions & Answers

Alexander Robart Partner Office: +1 713 929 3261 Mobile: +1 434 294 1396 Email: [email protected]

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