unconventionals and the new commercial environment/media/files/insights/events/... ·...

Unconventionals and the

new commercial

environment

February 2017

• About BRG

• North American Unconventionals

– primer

• The Shale Revolution

– Technology and efficiency improvements

– Enablers

– Impact of the Shale Revolution

• The Permian Story

– Apache Alpine High

• Implications

2

Discussion Points

BRG brings global experience

• About BRG


– primer



– Enablers




• Implications

4

Discussion Points

The Lower 48 has ~4.2 million wells of all types to

date, so success in unconventional drilling was

enabled in part by data availability

Source: Drilling Information

These ~ 4.2 million wells provided a wealth of

information about North America’s many gas and

oil/liquids unconventional plays

10

Basins

Gas Plays*

Oil/Liquids Plays*

*A “play” is an area in

which hydrocarbon

accumulations or prospects

of a given type occur.

Source: PacWest Consulting Partners (now IHS Markit)

Since 2007, there have been 379 thousand wells

drilled (107 thousand horizontal)

7

Other activity enablers included that combined to create intensive, economic drilling:

Favorable industry regulatory environments in key states, coincidence plays with private land

ownership service company and skilled labor availability, industry focus on key value drivers,

unprecedented sharing of learnings by operators, service companies, academics, industry groups, and

other consortiums , presence of existing infrastructure, etc.

Source: DrillingInfo

In oil and gas friendly Texas there were ~75 billion in

capital expenditures 3 years ago, which drove the “Texas

Miracle” economy

8

Permian Basin5.1 BCFD

1.61 MM BOPD

Eagle Ford5.5 BCFD

1.1 MM BOPD

East Texas3.3 BCFD

57 M BOPD

Barnett5.5 BCFD

3.2 M BOPD

Granite Wash0.43 BCFD

13 M BOPD

Low

High

Mid

:Current

Permitting Activity

Current Rigs

Wells


Eagle Ford drilling activity was a key factor in

driving Texas oil and gas capital expenditures and

production growth

9

Eagle Ford development through 2007 –

6 total wellsEagle Ford development through 2016 YTD

– 17,587 total wells


• About BRG


– primer



– Enablers




• Implications

10

Discussion Points

The Shale “Revolution” had wide ranging impact

and consequences

11

Source: U.S. Energy Information Administration

It reversed the long term decline in US oil

production

12

Source: U.S. Energy Information Administration, IHS Global Insight, and DrillingInfo

It continued in the face of North American gas price

collapse as operators moved drilling activities to liquids

rich plays – termed the “shift to liquids”

13

Source: Baker Hughes

Improving well economics were, and continue to be,

driven by industry focus on key technologies

developments that improve productivity and lower costs

14

Source: str.llnl.gov

• Location information

• Drilling mechanics information

• Formation information

1) Lateral

length2) Well

placement

3) Fracture

density

and size

What does a 10,000’ horizontal well look like?

15

A typical (in some

plays) unconventional

well drilled to a

formation 10,000’ feet

deep with a lateral

length of 10,000’:

10,000 foot lateral would stretch 40 40 blocks

North (from the base of Central Park to the

playing fields North of the Jackie O’ Reservoir)

The empire state

building is 1,454

feet tall

10,000’ depth would be about

7 times the height of the

Empire state building

Productivity improvements were driven by

increasing lateral length…

16


Marcellus wells average perforated interval, feet

2007-2015

CAGR =

16%

Completion year

And improvements in industry’s ability to place

the well where in the best rock, while drilling

faster and cheaper: MWD and LWD

17

Source: slb.com; haliburton.com; Wikipedia

• Location information – ensures the well can

be drilled to plan and placed where desired

• Drilling

mechanics

information –

maximizes

penetration

rate, avoids

buckling the

drill string

• Formation information – allows the operator to adjust well

placement based on real-time information (faults, fractures, dip)

This combined with proppant and frac fluid

volume increases and increased number of frac

stages

18

The newest productivity improvement

advancement is termed “Mega-fracing”

19

“Proppagedon”

• October 2016:

Chesapeake’s

Black 2&11-15-

11 IH well in

the Haynesville

Shale

• The company

used over 50

million

pounds of

sand to frac the

nearly 10,000’

lateral well

The fracing operation – one part of the value

chain: ~ 2/3’s of well cost

• 2–15+ million gallons

of water

• One large truck for

each 100,000 lb of

sand (~50 to 500

truckloads)

• Proprietary mix of

chemicals

• Compressor chains

to pump fluid and

proppant into

wellbore

Source: BRG Research

Longer laterals require creative solutions:

dissolvable frac plug technology

21

Source: Brammer Engineering

• Longer laterals complicate the fracture stimulation process

• Drilling out fracture plugs at the toe-end of a 10,000’ lateral is

impossible in some cases

• Plugs that dissolve in a matter of days eliminate this problem –

enabling longer laterals and bigger frac jobs

Technology has played a huge role – year on year

productivity improvements have been astonishing…

22

Source: BRG analysis

Marcellus average well productivity by well vintage

MCF/D

…The pace of productivity improvements has not slowed

despite downturn in prices

Best wells

Utica/Marcellus exceed

30 mmcfd (Range,

Rice, Mag Hunter,

others)

Source: Drilling Info; Shale Experts: http://www.shaleexperts.com/articles/Top-IPs-Utica-Shale-Wells_999980406

Average Utica and

Marcellus 2016

investor presentation

well productivity type

curves yield high

IRRs even at today’s

prices

Utica

Marcellus

Marcellus average well productivity by well vintage

MCF/D

Drilling efficiency improvements also contributed

significantly to unconventional production

24

Rig productivity

improves from

17.5 to 43 wells

per year

Source: EOG Investor Presentation

Increased North American Rotary Rig Count combined

with increased drilling efficiency are key drivers of the

shale revolution

25

0

200

400

600

800

1,000

1,200

1,400

1,600

North American Totary Rig Count

Horizontal Directional Vertical

Shale Revolution

Source: Baker Hughes Rig Count

These factors all combined to drive steep

increases in play production

26

Example taken from the Eagle FordSource: EIA, Trends in US Oil and Natural Gas Upstream Costs, 3/2016

Technology improvements, coupled with the recent

uptick in oil prices have brought investors back

27

Technology

improvements

have enabled

some drillers to

achieve better

economics at

$50/bbl today,

than they saw

when oil was

$100/bbl

Source: Oxford Economics/Haver Analytics

The beginning of the next boom?

28

• These improved well economics are facilitating increased investment

• And, increasing investment is bringing back drilling activity, and

driving a rapid turn-around in U.S. oil production

Source: Wall Street Journal, The Daily Shot

There are several enablers of the “Revolution”

that are worth mentioning

• Adoption of the manufacturing mindset by operators

• Sharing of learnings by operators, service companies, academics, industry

groups, and other consortiums

– Across plays

– Between plays

• Infusion of capital as investors such as pension funds sought returns

• Coincidence of shale plays with private lands

• Not everyone wins

29

An era of cheap money sends investors to oil and gas

30

Source: https://fred.stlouisfed.org/series/FEDFUNDS

Effective Federal Funds Rate, percent

0

1

2

3

4

5

6

7

Energy Focused PE Firms – $133 Billion

31

Source: TPH, Money Book, 3/15

Most unconventional plays are located on

accessible private land, not federal lands

32

US Gas and Oil Shale Plays

Overlap area of shale plays

and Federal Lands

US Federal Lands (excl. BIA)

Source: Adam Sieminski, Testimony of the Energy Information Administration, U.S. House, Subcommittee on

Energy and Power Committee on Energy and Commerce, 2 August 2012

Some companies stumbled: One prime example is the

Sumitomo JV buy in to Devon’s Permian Basin assets

– Cline Shale/ Wolfcamp/ Mississippian

33

2014 active rigs and permitting heat map as of December 2014

Cline

Shale

Sumitomo /

Devon acreage

Bone Spring

Delaware

Wolfcamp/

Leonard

Wolffork

Source: Drilling Information; Internet research investor presentations

Impact of the shale revolution

• Pipeline reversals

– Seaway Cushing

– Multiple Texas pipes that originally flowed N-S

• Use of Rail to transport oil in mid-continent

– 600,000 bbls per day

• OPEC actions

• Lifting of crude export ban

• Complete reversal of projection that US needed to import gas to satisfy

increasing demand

– Import and regasification to LNG exports

– Perception of long term supply of cheap natural gas

– Structural damage to coal industry as gas supplants coal as cheap, clean

fuel source for power

34

Pipeline reversals and use of rail

35

Seaway

Pipeline

Source: RBN Energy

Pipeline Reversals and use of rail

36

Actual and estimates in 2010 Estimates in August 2016

Source: North Dakota Industrial Commission Oil and Gas Division

OPEC quota reliability is questionable

37Source: WSJ, The Daily Shot

OPEC consistently misses their quota… …Different this time?

Will shale fill the

curtailment as

prices rise?

The 40+ year old ban on exporting crude from the

U.S. is lifted.

38

12/2015: “Congressional

Leaders Agree to Lift 40-Year

Ban on Oil Exports” – WSJ

Tight oil production

Millions of barrels per day

7/2013: “The Case

for Allowing U.S.

Crude Oil Exports”

– Council on

Foreign Relations

3/2011 “Can We

Do Without the

Mideast” – New

York Times

12/1975: President

Ford signs into law

the Energy Policy

and Conservation

Act, banning export

of crude oil

9/2008: “Can

Offshore Drilling

Really Make the

U.S. Oil

Independent?” –

Scientific

American

2007: Congress

passes the Energy

Independence and

Security Act – The

White House

6/2015: “America’s

Self-Punishing Oil

Export Ban” – WSJ

Source: EIA, BRG Research

Shale gas production: from importing to exporting LNG

39

Source: EIA

• About BRG


– primer



– Enablers




• Implications

40

Discussion Points

Even though activity has slowed, the Permian Basin is

still the hottest area today for drilling and land

investment activity


Rig

Structure contour

Wells

El Capitan

El Capitan is the best outcrop of the Permian reef

complex that rimmed the Delaware basin

42

Capitan Reef

Capitan Reef

A view of the Permian aged Capitan reef looking up the

from the basin floor

Brushy Canyon

Channel (500+ ft.)

Mega-frac techniques generating sub $30

breakeven wells in the Midland Basin

43Source: Pioneer Natural Resources Analyst Presentation and Financial Times

Astoundingly, Permian has only produced 20% of

expected total production

44Source: Pioneer 2016 Investor presentation

Even though activity has slowed, the Permian Basin is

still the hottest area today for drilling and land

investment activity


Rig

Structure contour

Wells

El Capitan

Alpine High

The recently announced Apache Alpine High discovery is

near Fort Davis, MacDonald Observatory and Balmorhea

Springs

Rig

Structure contour

Wells

Alpine High

X

X’


Apache – Alpine High – considerable uncertainly

remains about size and future production

volumes

47

X X’

Source: Apache Investor Presentation, IHS Market; 9/27/16, FuelFix 2/14/17

We note that the

Alpine High

discovery is in an

area that has

been described

as “historically

underperforming”,

with recent

drilling results

termed

“disappointing” as

initial production

in new wells is

was not as strong

as in earlier

Alpine wells.

• About BRG


– primer



– Enablers




• Implications

48

Discussion Points

Things we have not touched upon

• Environmental issues

– What about earth quakes in Oklahoma?

– Groundwater contamination?

– Will water needs be an issue?

• Political impact

– Impact of Trump administration on fracing?

– Why does New York ban fracing, what is the economic impact, how

does it compare to Pennsylvania?

– What about fracing within city limits?

• Business and commercial issues

– Emerging plays?

– Who are the best operators?

– Economics (micro and macro)?

• How do the DINOSAURS fit in?

49

Camarasaurus – Shell Wyoming

50Sources : Bob Simon – Dinosaur Safaris and Fukui Prefectural Dinosaur Museum (https://www.dinosaur.pref.fukui.jp/en/dic/Camarasaurus.html)

Shell Wyoming Camarasaurus is currently on display

at Fukui Prefectural Dinosaur Museum in Japan:

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