Presentation to the Alberta MLAs Mark A. Scholz CAODC President

Overview Introduction to the CAODC Who is the CAODC? The work of the Association What our members do? How to measure our industry’s strength State of the Industry Report Economic Value Commodity Prices Impact to Drillers and Service Rigs 2016 Forecast Economic Consequences Opportunities Alberta Royalty Review Four Ways to Look at Global Carbon Footprints

About the Membership Land Drilling Contractors 40 Land-based drilling rig fleet 754

About the Membership Service Rig Contractors 82 Service rig fleet 1030

About the Membership Offshore Drilling Contractors 3 Offshore rig fleet 6

CAODC remains true to what its founding members envisioned in 1949: to promote strong, safe and efficient operations in Canada’s rig sector. Operational Excellence – Industry Standardization Recommended Practices (RPs) Training/Competency Health, Safety & Environment (HS&E) Business Processes Communications & Advocacy Labour challenges Market access Competitiveness Effective regulation and public policy, harmonization Industry education – public and government Worker outreach and recruitment Statistics – Rig Activity (Utilization, Operating Days)

1.Drilling rig drills down to discover the viability of a basin. 2.A service rig is brought to the site after a drilling rig's work is complete 3.The pump jack is used when a well is 'on-stream.’ The machinery in the pump jack mechanically pulls oil or gas to the surface. Oil & Gas Basics The Life Cycle of a Well

Assets: Rigs/equipment, people Revenue: Fee for service, day rate Implications: Rigs must be contracted in order to generate cash flow. Comparison of Business Models Assets: Producing well(s) Revenue: Production multiplied by the spot or contract rate. Implications: E&Ps have continuous cash flow from a producing well(s), even in a low price environment. Exploration & Production (E&P)Drilling/Service Rig Contractor Service & Supply

1.Rig Counts Knowing how many active drilling rigs are at work indicates how busy the rest of the oil and gas industry is. One (1) Active Rig = 135 direct and indirect jobs Oil and gas is a labour intensive industry and generates jobs:  directly at the rig (approx. 20)  indirectly in the oilfield service sector (approx. 115)  in rural communities near oil and gas exploration and production Three Ways to Measure Rig Activity

2.Rig Utilization Rig utilization is the percentage of active rigs. In Canada, rig utilization has a distinct annual cycle. Rigs are busiest in the winter and experience a period of low rig activity called spring break-up. The activity cycle is very pronounced for drilling rigs (fewer drilling rigs work in spring and summer) and slightly less pronounced for service rigs. Three Ways to Measure Rig Activity

3.Operating Days & Operating Hours Rig contractors charge for services based on operating days. Operating days reveal the strength of the rig sector better than well counts. Currently, oil and gas companies in western Canada are drilling and maintaining complex horizontal wells. This means drilling contractors are drilling fewer wells, but they're working as many operating days. Three Ways to Measure Rig Activity

 Largest private sector investor in Canada ($48 billion estimated in 2015, down from $81 billion in 2014)  Annual government revenues of $17 billion (three year average to 2014)  Employs approx. 450,000 in Canada (direct & indirect)  Canada is the 5 th largest producer of natural gas globally  Canada is the 5 th largest producer of crude oil globally  GDP Impact provincially of the oil and Gas industry across Canada between (CERI 2015) - $7.6 trillion  AB = $5.9 trillion  BC = $765 billion  ON = $395 billion  SK = $362 billion  MB = $32 billion  QC = $124 billion  NL, NB, NS, PEI, NWT, NV, YK, = $29 billion Economic Value of the Industry

 2014 capital expenditure of $33.9 billion, 2015 forecast down to $23 billion  The Oil Sands industry will utilize:  over 20,300 Alberta companies as suppliers and business partners  over 2,300 Canadian companies (outside Alberta) as suppliers and business partners  over 300 Aboriginal owned companies as suppliers and business partners  Oil Sands development is expected to contribute over the next 20 years:  $4.0 trillion to the Canadian economy (CERI 2015)  pay an estimated $1.2 trillion in provincial and federal taxes (CERI 2015) Economic Value of the Industry Oil Sands

Source: ARC Financial Since July 2014 – 71% drop in pricing in North American prices (WTI) ($100/bbl to $29/bbl) The story is worse for Canadian heavy crude producers who sell at a discount for less than $20/bbl.

Source: IEA Brent Oil Price Vs. Global Over-Supply Estimate first half of 2016 supply-demand imbalance is 1.5M barrels.

Trillions of dollars in global market value lost, impacting retirement funds, jobs, businesses, communities and future investment opportunities. Source: ARC Financial 40% drop in market value 50% drop in market value

Where are Prices Going? Here is what the future/forward strips (January 12, 2015) look like. Source: ARC Financial

What do these prices mean for Canadian energy producers? Most of North American production is under threat. Source: Wood Mackenzie

What do these prices mean for global energy producers? All global jurisdictions but Saudi Arabia are under threat. Source: Energy Aspects

But if you include OPEC median budgetary breakeven price, even Saudi Arabia is feeling the pressure of the low price environment. Source: OPEC "break-even" prices in (Matthew Hulbert/European Energy Review)

1. Global Oil Demand Slow global growth (i.e., China) resulting in low demand growth. Source: ARC Financial What is behind the lower price environment? A traditional supply / demand imbalance.

OPEC aka Saudi Arabia’s market share strategy. Source: ARC Financial What is behind the lower price environment? A traditional supply / demand imbalance. 2. OPEC Production

Source: ARC Financial What is behind the lower price environment? A traditional supply / demand imbalance. 5 MMB/d to 10MMB/d (2011 – 2015) 3. US Production Record production from the US resulting in high inventories. Iranian lifted sanctions to add an estimated 500k to 1mm/bpd.

Source: CAODC Impact on the drilling and service rig community …

Source: CAODC Lowest active rig count since the 1980s. Lowest utilization recorded by CAODC (1977). Lowest operating days in over two decades. Lack of winter drilling – Q1.

Source: CAODC

Estimated Capital Flow in the Canadian Oil and Gas Economy for 2015 Industry Revenue, Cash Flow, Reinvestment Drilling Activity and Production Source: ARC Financial

 Industry revenues down 40% $150 billion in 2014 to $90 billion in 2015  Oil and gas share of TSX down from 20% in 2014 to 12% in 2015  Announced layoffs to date – 40,000 direct. Direct & indirect – 100,000 Canadians Impact of declining commodity prices in 2015 Revenue Source: CAPP, ARC Financial

Impact of declining commodity prices in 2015 Capital Investment  Canadian capital investment show significant year/year reduction 2015 down 41% reduction in 2015 from 2014 $81 billion in 2014 to $48 billion investment down at least 12% from 2015 Oil sands down almost one-third in 2016 from 2014  Upstream sector still largest private sector investor in Canada Source: Statistics Canada

Combined Capital Investment Capital Investment in Canada Source: CAPP

 Announced layoffs to date – 40,00 direct  Direct & indirect – 100,000 Canadians (CAPP)  Land sales are down across Western Canada  Bonus paid down from $1.1 billion in 2014 to $375mm in 2015  In Alberta for example, the price paid per hectare, is down about 60 per cent, selling on average for $185 this year compared to $453 last year Impact of Declining Commodity Prices in 2015 Source: CAPP

Time Out Let’s talk about the opportunities!

100% Capital Investment in Canada World Oil Reserves Source: CAPP

Market Access and Diversification Traditional Markets vs. Non-Traditional Markets World natural gas consumption 1990 – 2035 (trillion cubic feet) Source: EIA

Net Oil Imports Market Access and Diversification Traditional Markets vs. Non-Traditional Markets Source: CAPP

Market Access and Diversification Canadian Oil Sands & Conventional Production Source: CAPP

Market Access and Diversification Quebec imports 1/3 of its oil from 5 corrupt nations Source: Resource Works

Objectives :  To provide optimal returns to Albertans as owners of the resource.  To continue to encourage industry investment.  To encourage diversification opportunities such as value-added processing, innovation or other forms of investment in Alberta. 2015/16 Royalty Review

Optimal Returns? What about…  High paying, high skilled job opportunities for Albertans.  The service sector is a benefactor of industry activity and are locally owned and operated in the province.  Small businesses such as hotels, restaurants, retail, etc. are a product of positive externalities from industry activity.  What about corporate, personal and fuel taxes, etc. that are created through industry activity?  Is this all about optimizing government royalty revenue or optimizing benefits to Albertans? The two concepts are not necessary mutually inclusive. 2015/16 Royalty Review

CAODC Position  Royalties should be lowered to offset the increased cumulative costs to industry in order to preserve Alberta’s competitiveness.  20% corporate tax increase  Higher carbon levies  Royalty rates should optimize the benefits to Albertans and not necessarily government revenue.  This is not a pure business decision.  The government should consider being the most competitive rather than middle of the road. 2015/16 Royalty Review

Four ways to look at global carbon footprints

Four Ways to Look at Global Carbon Footprints 1. INTENSITY Energy efficiency has helped many developed nations reduce their GHG intensity – emissions per unit of GDP. (millions of metric tons) Source: National Geographic

Four Ways to Look at Global Carbon Footprints 2. PER CAPITA Countries with large populations, including fast-developing countries like India, have low emissions per capita compared to many industrialized countries. (millions of metric tons) Source: National Geographic

Four Ways to Look at Global Carbon Footprints 3. CURRENT EMISSIONS China is the world’s top contributor of GHGs, followed by the United States. (millions of metric tons) Source: National Geographic

Four Ways to Look at Global Carbon Footprints 4. CUMULATIVE EMISSIONS Measured since 1850, reflecting historical industrialization, emissions from the United States and Europe far surpass those of other nations. (millions of metric tons) Source: National Geographic

 Oil Sands GHG emissions have declined 30 per cent per barrel from 1990 to  Canada produces about 2% of global C0 2 emissions. Oil Sands account for 8.5% of Canada’s GHG emissions while transportation accounts for 23%. Oil Sands Statistics Environmental Source: CAPP

Canadian Association of Oilwell Drilling Contractors Suite 2050, th Avenue SW Calgary, AB T2P 0Z3 Tel: Fax: Web: