shale gas: impacts on the value...
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This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent.
Milano, July 1st 2014
Shale Gas: impacts on the Value Chain
Tiziano Rivolta*
*Bain & Company Italy, Inc.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 2
Impacts on the value chain of Shale Gas revolution
ClientsOil&Gas
Co.Suppliers
• Relevance of the "Big 3" (Halliburton, Schlumberger, Baker Hughes)
• New requirements
- Technological
- Service model
• …
• New breed of the Independents
• Organizational complexity for IOCs
- Acquisitions
- Separate organizations
• …
• Petrochemical
- Renewed competitiveness of NA PetChem industry
- Revamping of existing plants
• …
TIME Magazine - 4/11/2011: "This Rock Could Power The World - Why Shale Gas Can Solve The Energy Crises"
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 3
Shale plays differ significantly from conventional resources
Conventional resource Shale
Oil&Gas Co.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 4
Shale requires a programmatic approach
• Large isolated reservoirs; greater new field exploration risk
• Distributed reservoirs over large extends of land; less exploration risk
• High, with varying characteristics across the field
• Low: reservoir characteristics homogenous across the field
• Unique design often needed for each well
• High potential for replication between wells
• Long well lifetime less dependent on interventions
• Multiple interventions/fracsrequired to sustain well volume
• Relatively mature technology –slower changes in cost curve
• Relatively new – possibility for large improvements in cost curve and systems
• Individual HSE incidents can be extreme impact (low frequency incidents) especially in offshore environment
• HSE incidents likely be smaller focused on ground water contamination
Conventional resource
Exploration risk
Geological complexity
Engineering complexity
Operating model
Technology
HSE
Shale
Oil&Gas Co.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 5
Companies need to develop or acquire a number of shale-specific skills in each phase of the value chain
•Fast acquisition of small land tracts based on limited info (e.g. 2D logs)
•Rapid piloting and high-grading of technical solutions
•Factory process to minimize down-time and accelerate development
•Down-spacing and multilateral wells to maximize pad utilization
•Coordination of fracing stages for existing wells to optimize well life and balance field production
•Sophisticated O&M logistics
•On time development of gathering lines and processing facilities
•Capacity sizing and utilization linked to field development plan
Access & exploration
Drilling & completions
Production Midstream
Technology
Support functions
• Multilateral fracturing• Hydraulic fracturing
• Sophisticated sand and water logistics
• Large volume of data collection and information processing
• Debottlenecking support services to process high volume of repeatable tasks
Oil&Gas Co.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 6
Size of reserves has attracted IOCs with an eye toward global opportunity
Source: IHS Herold; National Petroleum Council; MIT Energy Initiative
Sep ‘08
Aug ’09
Dec ’09
Jan ’10
Mar ‘10
May ‘10
Aug ’10
Aug ‘10
Nov ’10
Mar ’11
Jun ‘11
Oct '11
Timing Entrant Seller/Partner Additional moves
(Oct ’10 - Jun ’11)
(May ‘10)
(Jun ‘10)
(May ‘11)
(July ‘11)
Oil&Gas Co.
(Oct ’12)
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 7
0
20
40
60
80
100%
Barnett
CHK
Southwestern
EOG
Total
SmallINDs
Pioneer
Exxo
n
BHP
Exxo
n
BP
Haynesville
EOG
Devon
Plains
CHK
Encana
Ana
dark
o
Exxon
BHP
BG
SmallINDs
ConocoChevronTotal SA
Marcellus
TailsmanUPL
SouthwesternEOG
Range
CHK
Anadarko
Noble
BG
Gail
Reliance
Small INDs
Chevron
Shell
StatOil
Exxon
Utica
Hess
Anad
arko
CHK
Devon
Small
INDsExxon
Che
vron
Eagleford
PioneerMurphy
Hess
BHPTailsman
CHK
EOG
Newfield
Anadarko
Apache
Reliance
CNOOC
KNOC
SmallINDs
StatOil
Shell
Marathon
ConocoExxon
Bakkens area
EOG
Newfield
Whiting
Continental
Hess
StatOil
Small INDs
Marathon
Conoco*
Exxon
Niobrara
Devon
EOG
Anadarko
CHK
Noble
Continental
CNOOC
SmallINDs
Marathon
Whiting
Shell
Approximate U.S. shale positions by major play(~38M acres held)
Fayetteville
Rapid consolidation amongst operators is taking place, increasing importance of IOCs and large Independents
*Note: ConocoPhillips data from firm website and includes entire Williston Basin (N.Dakota, Montana, and Canada). Positions are an approximate view of most major acreage holders in Q4-2011 in selected basins only. Utica positions are approximate as majority of acquisitions are in last six months
Source: Operator investor relations presentations; literature search; Bain analysis
Dry gas NGL Shale/tight oil
Oil&Gas Co.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 8
Traditional E&P functional model unlikely to be appropriate for shale gas operations
•Ability to leverage technical expertise across entire business
•Technical skills needed for shale unique
•Focus on optimizing capital allocation& resources across global project portfolio
• Less need to analyze economics of individual projects – need to focus on system and program economics
•Common processes drive consistency across the organization (e.g. well delivery, safety response)
•Common processes may be over engineered for shale gas, introducing unnecessary costs into system
• Increased efficiency in project execution and use of resources
•Repetitive processes necessary to drive down costs
•Focus on quality of functional performance globally
•Speedy cross-functional issue resolution and local optimization needed
Functional model typically adopted for specific benefits…
…that are not applicable in shale operations
Oil&Gas Co.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 9
Small number of critical actions likely to be required to build a ‘shale gas factory’
• Ensure vision reflected in field development plans – what are we solving for? What does success look like? (different for Brownfields and Greenfields)
• Develop asset based organization structure that facilitates the delivery of field development plan
1
• Modify the corporate structureto support specialization in shale (e.g. more asset focused)
2
3
• Retain high calibre people from acquisition/JV - build and transfer shale knowledge base and capabilities to other parts of organization
5
• Redesign existing processes and/or design new processes, using a ‘lean approach’ to meet shale-
specific requirements (Access, well
design, completion & tie in etc...)
4
Oil&Gas Co.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 10
Key players are carving out separate organizations to develop their shale skillset
• ExxonMobil acquired XTO Energy in early 2010
• XTO continues to operate as a wholly-owned subsidiary of XOM
• Use of remote monitoring and operating centers: “information to make decisions is at fingertips, and replaces need for multiple meetings”
• In May 2008 EnCana announced that it was spinning into two companies:
- EnCana, focused on development of unconventional natural gas
- Cenovus Energy, an integrated oil company focused on tar sands assets
• “We will be better equipped to direct their strategies and operations towards building value by tailoring practices and execution to fit the unique nature of their assets” – Randy Eresman, EnCana CEO
• In late 2009, Talisman Energy reorganized its North American operations to clearly focus on shale vs. conventional assets
• Focused on optimizing key value levers for unconventional gas (lean well delivery, zipper fracs and supply chain optimization)
• As a result investment break-even cost reduced from $6.5/Mcf in 2009 to expected ~$3/Mcf range in 2011
• “It's all about what we call lean manufacturing processes within North America, which continuously work to drive down the operating costs” - John Manzoni, 2011, President
Source: companies’ webpages, analyst presentations and press releases
Oil&Gas Co.
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 11
Gas prices vary region-by-region… driven by local supply conditions
Asia-Pacific$15-20/MBTU
Europe$6-12/MBTU
North America$2-5/MBTU
Source: EIA, Bloomberg
Clients
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 12
0
200
400
600
800
$1,000
2000 Ethylene average production
cash cost, U$/MT
US E
thane
US ethylene is - for example - now more cost competitive compared to other regions
0
200
400
600
800
$1,000
2011 Ethylene average production
cash cost, February, U$/MT
US E
thane
Source: CMAI presentation to SW chemical association, Feb 2011; KB Consulting Cost Model
Clients
YESTERDAY (2000) TODAY (2011)
Bren
t cru
de:
U$30/B
BL
Natu
ral
Gas:
U$4/M
MBTU
Bren
t cru
de:
U$94/B
BL
Natu
ral
Gas:
U$4.3
5/M
MBTU
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 13
Therefore, NA petrochemical producers have become highly profitable due to cost advantaged feedstock
Source: J.P Morgan; Deutsche Bank; Credit Suisse; Wells Fargo; Dow Chemicals; LyondellBassell; Bloomberg; Bain Analysis
40%CAGR
64%CAGR
218%CAGR
60%CAGR
RESULTING IN IMPROVED STOCK PRICES, DESPITE
MARKET VOLATILITY
PETROCHEMICAL COMPANIES HAVE EXPERIENCED
SIGNIFICANT EARNINGS GROWTH
Clients
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 14
2000
6
2005
13
2011
Halliburton
Schlumberger
BakerHughes
Others
40
Explosive growth has opened opportunities for niche providers but ‘Big 3’ best positioned to meet emerging needs
Source: Bain analysis
"Big 3"
Suppliers
PRESSURE PUMPING REVENUE BY COMPANY ($B)
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 15
Unconventional technology is developing rapidly and costs continue to decrease
Time to drill(days)
20
11
30 day avg.production
rate (mcf/day)
1,006
2,439
+142%
SHALE TECHNOLOGY ADVANCEMENT
1
2
5
10
20
50
100
Cumulative # of wells drilled
SWN Fayetteville shale gas well costs($/Bcfe)
20122011
2010
20092008
2007
2006
20052004
Slope = 72%
Costs decline by 28% with each doubling of
wells drilled
Costs decline by 28% with each doubling of
wells drilled
-45%
Source: Spears & Associates, Simmons & Company International, Southwestern Energy, Bentek
Suppliers
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 16
OFS providers critical to helping operators reduce costs, as a large portion of CAPEX comprised of their services
“Well manufacturing will play an increasing role in shale in NA, but I don’t see a large role for OFS providers. It’s operator led.”
- Board Member of private shale player
In completions, operators looking for OFS to drive well factory
“The key role for an OFS provider is to adjust offerings to accommodate well factory, but it will be lead by operators.”
- NA shale consultant
D&E Completions Production
“There are lots of opportunities to work with Baker Hughes to reduce costs. This would be mutually beneficial – they could up-sell us.”
“We’ve seen significant efficiency enhancements, and strongly believe there's tremendous opportunity for further improvements.”
Source: Spears & Associates; Bain analysis
Suppliers
In drilling, operators driving well factory approach but OFS needs to be responsive
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 17
Reward
Production Enhancement
Contract
Mature field management
•Fees based on tariff per barrel
•Value added through:
- Apply sub-surface capabilities to increase production
Production Sharing
Agreement
Risk Service Contract
Build, operate, transfer
•Fees based on KPIs
•Value added through:- Innovative design
- Cost effective execution
Field development and operation
•Fees based on share of production
•Value added through:
- Fast track delivery with early production
- End-to-end field management
- Apply sub-surface capabilities to identify by-passed resources
Risk
Fee for Service
Provision of discrete services
•Fees based on nature of services rendered
•Value added through:
- Technical innovation
- Low cost
- Degree of integration
Potential also exists to move towards more outcome-based pricing (as is happening in conventional)
Shale today
Future?
Suppliers
This information is confidential and was prepared by Bain & Company solely for training purposes; it is not to be relied on by any 3rd party without Bain's prior written consent. 18
To conclude
•Shale gas has transformed global gas industrygenerating profound industry consequences, severe disruptions along the natural gas value chain and, on the other hand, tremendous opportunities
•Shale gas is different to conventional resources and the traditional E&P functional model does not work effectively
•A new operating model is required in order to succeed in shale gas with a small number of critical actions needed to build a ‘shale gas factory’
•Service providers and components manufacturers have to evolve too in order to develop effective relationships with producers focusing more on true results delivery (price effectiveness and technology innovation)
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