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Unconventional Oil & Gas Demystifying Fracking and Understanding Global Opportunities

September 2014

1of 15 THIS MATERIAL MAY ONLY BE PROVIDED TO YOU BY VAN ECK GLOBAL AND IS FOR YOUR PERSONAL USE ONLY AND MUST NOT BE PASSED ON TO THIRD PARTIES WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF VAN ECK GLOBAL. IF YOU HAVE NOT RECEIVED THIS MATERIAL FROM VAN ECK GLOBAL, YOU ARE HEREBY NOTIFIED THAT YOU HAVE RECEIVED IT FROM A NON-AUTHORIZED SOURCE THAT DID NOT ACT ON BEHALF OF VAN ECK GLOBAL AND THAT ANY REVIEW, USE, DISSEMINATION, DISCLOSURE OR COPYING OF THIS MATERIAL IS STRICTLY PROHIBITED.

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2of 15 Demystifying Fracking & Understanding Global Opportunities

. Unconventional oil and gas extraction from via horizontal drilling and fracturing (often referred to as “fracking”), though in existence for some time in some form or another, has only recently been explored in depth in the U.S. and has experienced significant advancements via the evolution of drilling technology

. While unconventional oil has been transformational for the U.S., we believe we are still primarily in the “discovery and delineation” stage of unconventional oil resources

. As the U.S. enters the “exploitation phase”, companies may continue to improve and capitalize upon drilling efficiencies, adding value and potentially contributing, perhaps significantly and over longer periods, to global production and reserves

. Unconventional are not unique to the U.S.; many other countries have substantial potential

. When taken to its logical conclusion, unconventional oil and gas production has significant implications with respect to the global , though challenges still remain

3of 15 Stepping Back – How is Oil & Gas Formed?

. Over millions of years, heat and pressure formed by the layering of sediment and rock have turned the remains of ancient marine organisms into oil and gas which are now “trapped” in these layers miles below the earth’s surface

Source: www.need-media.smugmug.com; Data as of September 2014.

4of 15 Conventional vs. Unconventional Oil: A Primer

CONVENTIONAL UNCONVENTIONAL

. High permeability . Ultra tight rock

. Fracking: minimal . Fracking: large, hydraulic

. Principal evaluations: . Principal evaluations: Seal/Trap

. Trap . content

. Seal Conventional Gas . Maturity . Source . Clay content . Reservoir Conventional Oil . Pressure . Migration . Bulk volume Permeable rock formations . Timing (oil and gas can migrate through)

. Primary risk: geologic Source rock where oil and gas forms . Primary risk: economic

. Access: vertical wells . Access: horizontal wells

Source: Pioneer Natural Resources; Data as of September 2014.

5of 15 Three Factors that Sparked the U.S. Shale Revolution

Horizontal Well With Multi-Stage Fracturing I. Horizontal drilling technology (began 1930’s):

. allowed access to significantly greater volume of reservoir rock

II. Horizontal hydraulic fracture stimulation technology (began 1950s):

. created porosity and permeability – created “channels” that allowed oil and gas to flow

III. Historically strong commodity prices

Source: EnCana, Pioneer Natural Resources; Data as of September 2014.

6of 15 How the U.S. Shale Revolution Has Shaped U.S. Energy Production

. has encouraged coal-to-gas switching among electricity producers

Previous Power Generation Mix Current Power Generation Mix Projected Power Generation Mix 2005 2013 2040

2005 Capacity = 4.1 2013 Capacity = 4.1 2040 Capacity = 5.2 Trillion Kilowatthours Trillion Kilowatthours Trillion Kilowatthours

Natural Gas Coal 19% Coal Natural Gas 32% 40% 27% Natural Gas 35% Coal Renewables 50% 9%

Renewables 13% Nuclear & Other 19% Liquids Nuclear Renewables Nuclear 1% 16% 16% 19% Petroleum & Other Petroleum & Other Liquids Liquids 3% 1%

Source: Pioneer Natural Resources; Data as of September 2014.

7of 15 How the U.S. Shale Revolution Has Shaped Global Supply

. U.S. and Canada have been the only recent source of non-OPEC (Organization of the Petroleum Exporting Countries) supply growth

Oil Supply Growth During 2009 – 2014 Year-over-Year Growth in Supply (with Oil at $105 / bbl) U.S., Former Soviet Union (FSU), Non-OPEC ex-U.S. & FSU

95 1.5

1.4 1 -0.1 1.4 90 0.5 92.8 4.9

MMBbl/d 0 85 Million Barrels Per Day (MMbbl/d) Day Per Barrels Million Million Barrels Per Day (MMbbl/d) Day Per Barrels Million 85.2 -0.5

80 -1 2009 North Other Non- Saudi Arabia Other Opec 2014 America Opec

US FSU NON-OPEC ex-US & FSU

Source: U.S. Energy Information Administration (EIA); Data as of July 31, 2014.

8of 15 How Can the Value of Unconventional Resources be Increased?

Access More Rock Improve Well Economics

. Acquire more land . Faster drilling

. More stratigraphic layers . Reduce drilling costs

. Tighter well spacing . Optimize production

. Longer, more accurate laterals . Stack laterals

. More frac stages . Integrate frac distribution

. Bigger frac stages

9of 15 Case Study: Whiting Petroleum – More and Bigger Frac Stages

Older Style Completion Potential Annulus (Gaps) Stages Frac Ports / Stage Entry Points Free fluid between 30 1 30 packers

New Style Completion Perforation Potential Annulus (Gaps) Stages Clusters / Stage Entry Points

Cemented 40 3 120

Source: Whiting Petroleum; Data as of June 30, 2014.

10 of 15 Case Study: Concho – Faster Drilling, Longer Laterals and More Frac Stages

Average Drilling Days – 23% Decrease Average Lateral Length (Feet) – 9% Increase

4,657 30 26 23 4,359 4,266

2012 2013 1H14 2012 2013 1H14

Average Stages Per Well – 27% Increase Average 30-Day Initial Production (Boepd* per 1,000 Wells) – 18% Increase (note: figures intentionally hidden) 206

186 175

2012 2013 1H14 2012 2013 1H14

*Boepd = Barrels of Oil Equivalent per Day Source: ; Data as of June 30, 2014.

11 of 15 Case Study: Cimarex – Longer Laterals and More Frac Stages

Well Cost Estimates – Culberson County Wolfcamp D Wells 3000

Old New Long 2500 Well Cost ($MM) $8.0 $8.7 $13.5

Before Tax Internal Rate of Return (IRR) 30% 90% 161% 2000 Net Present Value (NPV) with 10% Discount ($MM) $4.0 $12.2 $31.6

1500 Barrels of Oil Equivalent / Day Oil Equivalent Barrels of 1000

500

0 0 6 12 18 24 30 36 42 48 Old Completion - 5,000 ft. lateral; 12 stages (12-well average) Months New Completion - 5,000 ft. lateral; 20 stages (4-well average) Long Lateral - 10,000 ft.; 43 stages (single well - Gallant Fox)

*Assumptions: Oil = $90 / barrel ; Gas = $4 / thousand of cubic feet; Natural Gas Liquid = $30 / barrel (full recovery) Source: Cimarex; Data as of June 30, 2014.

12 of 15 Game Hasn’t Even Started Yet Globally

. The potential U.S. unconventional resource opportunity remains vast; yet represents a fraction of global unconventional gas reserves and overall global oil production

Countries with Major Unconventional Gas Resources (# of Technically Recoverable Resources) Global Oil Production Million Barrels Per Day (MMbbl/d) Day Per Barrels Million

(Trillion cubic feet)

Source: U.S. Energy Information Administration (EIA), Bloomberg; Data as of July 31, 2014.

13 of 15 Some Issues to Consider: Capital Intensity (Production Profiles)

. High initial rates deliver a growing production profile . Production growth typically moderates but this happens, generally, after many years

Production Profile – Constant Well Quality Production Profile by Year – Constant Well Quality Gas Production, Billions of Cubic Feet Per Feet Per (bcf/d) Day of Cubic Billions Gas Production, Gas Production, Million of Cubic Feet per Day (Mmcf/d) Day Million Feet per of Cubic Gas Production,

Source: Pickering Energy Partners; Data as of July 31, 2014.

14 of 15 Some (Additional) Issues to Consider: Environmental Impacts

. contamination risk should be less of a concern as tests on well depth, frac length and corresponding distance from water aquifers generally exhibit large separations

Sample Map of Frac Treatments – Barnett Shale

Deepest Aquifer Depth Frac Length – Top – Top Distance between the deepest aquifer Oil Well – Midpoint and longest frac is approx. 4,000 ft. Oil Well – Bottom Frac Length – Bottom Oil Well, FracOil (Feet) Depth Aquifer and Length,

Source: The American Oil & Gas Reporter; Data as of September 2014.

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