1. Sandia National Laboratories is a multi-program laboratory managed and operated by Sandia Corporation, a wholly owned subsidiary of Lockheed Martin Corporation, for the U.S. Department of Energy’s National Nuclear Security Administration under contract DE-AC04-94AL85000. Shale Gas Production in the U.S.: Projecting Investment, Technology and Cost Impacts on Reserves La Tonya N. Walker, Peter H. Kobos, Leonard A. Malczynski

2. Acknowledgments  This project was funded under the Sandia National Laboratories’ Laboratory Directed Research and Development (LDRD) program.  Sandia National Laboratories is a multi-program laboratory managed and operated by Sandia Corporation, a wholly owned subsidiary of Lockheed Martin Corporation, for the U.S. Department of Energy's National Nuclear Security Administration under contract DE-AC04-94AL85000.

3. Project Overview  Shale gas production is changing the makeup and timeline for United States‘ (US) natural gas (NG) production  Potentially (1) large shift in demand from coal to natural gas-based electric power, & (2) NG exports increase the incentive to manage production appropriately to maximize return on investment.  Analysis focused on the dynamics between new technologies, production of supplies, and the changing incentive structure to produce natural gas  Three scenarios focus on the role of technology, investment, and environmental considerations  Employed the System Dynamics approach to forecast NG production based on current estimates of reserves to 2025+  Incorporates conventional, shale and coalbed methane gas extraction and discovery developments 3 Discussion The working results illustrate how technology improvement or external costs (e.g., environmental costs) may affect the size and growth of proven reserves. A Carbon Tax could lead to an increase in price, reduces quantity demanded, and increases Proven Reserves. An immediate usage step increase of 25% in 2020 reduces Proven Reserves. Long-term Energy Security Supply Changes Changing NG Demand Imports/Exports U.S. Natural Gas Supply

4. Natural Gas Production Model Description  Series of differential equations within the System Dynamics architecture  Provides projections and variability in resource estimation  Links to geoscience variables  Connects technology and environmental regulation constraints  To understand the motivations that caused the shale gas boom in the early 2000’s, and other shifts in NG production 4

5. Natural Gas Production Model (NGPM): A System Dynamics (SD) Based Natural Gas Model 5 ↓↓ CO 2 Tax ($50/ton): Demand ↓, Proven Reserves ↓ ↑ ↑ Demand Increase (25%): Usage ↑, Proven Reserves ↑ Cost  Price  Demand  Exploration  Proven Reserves Key Message: First application of a SD model for Shale Gas, demonstrated CO 2 tax decreases proven reserves (PR) and a demand increase increases PR. Shale Gas

6. Results: Effects of a Carbon Tax ($50/ton) and increase in Demand (25%) 6 Shale Gas Conventional Gas

7. Model Results Match Historic Data: Proven Reserves for natural gas in the U.S.  Three types of gas modeled  Shale gas  Conventional gas  Coalbed methane  Technology improvement or external costs (e.g., environmental costs) may affect the size and growth of proven reserves  Offers key insights to how sensitive the U.S. natural gas market is to increasing shale gas production 7 Conventional, shale gas and coalbed methane historical data and base case model projections Historical data: 1993−2011 Projections from 2012−2025

8. Main Takeaway Messages & Potential Future Research  Messages:  The synthesis of Geologic, Technology and Market factors matched historic shale gas production  CO 2 tax and demand changes will affect proven reserves  Future Research:  Increase market demand by sector and with additional technology and regulatory constraints  Include disruptive shocks in the model 8

9. Thank you 9

10. Key References  Energy Information Administration, 2013, Annual Energy Outlook (AEO).  Kobos, P.H., 2015, Shale Gas: Modeling the Economic Factors and Quantifying Uncertainty, Korea-U.S. Shale Gas Technology Cooperation Symposium, Seoul, Korea.  Naill, Roger F. “The Discovery Life Cycle of a Finite Resource: A Case Study of U.S. Natural Gas.” Toward Global Equilibrium: Collected Papers. By Dennis L. Meadows and Donella H. Meaows. Cambridge, MA: Wright- Allen, 1973, pp. 213-56.  Walker, L.T.N., Malczynski, L.A., Kobos, P.H. and G. Barter, 2014, The Shale Gas Phenomenon: Utilizing the Power of System Dynamics to Quantify Uncertainty, International Conference on System Dynamics Proceedings, Delft, Netherlands.  Walker, L.T.N., Kobos, P.H., and L.A. Malczynski, 2015, Shale Gas Production in the U.S.: Projecting Technology and Cost Impacts on Reserves, Shales at All Scales Workshop Presentation, Santa Fe, NM. 10

11. Natural Gas Production System Overview 11