Independents and unconventionals

Flexibility Rules in Shale Fields

Independent companies, both large and small, are widely acknowledged for spearheading the shale play phenomenon.

“Nimble” usually is the operative word here.

These players are known not just for their geoscience smarts but also for their speed in making critical decisions, quickness in snapping up desirable land positions and mineral rights, fast action in getting the wells down and more.

A big factor in the independents’ commanding role in the shales goes back to the 1980s when the majors in general determined that the significant finds onshore the United States had pretty much been drilled up. They went chasing after the frontier regions like the deepwater Gulf of Mexico and the Arctic looking for the big, lucrative fields their budgets demanded.

When they did opt to get in on some of the hot shale action, it was late in the game. Most of the desirable acreage was taken and costs overall had risen.

Big Companies, Small Advantage

But some of the big folks hopped in, apparently believing it was better to be late than left out.

A few entered on their own and others through the acquisition of smaller established players.

Shell latched onto a sizeable chunk of the Eagle Ford in 2010. Things didn’t pan out as planned, and the company recently sold its Eagle Ford stake to Sanchez Energy Corp. Shell president Marvin Odum was quoted as saying that the acreage doesn’t have enough materiality for a company of Shell’s size.

ExxonMobil acquired relatively small shale producer XTO Energy in 2010. Following the natural gas price collapse, the company began focusing on the liquids-rich areas, with a modicum of success.

Luis Baez
Luis Baez

A rarely talked about large company having a huge footprint in North American shales is Statoil, according to AAPG member Luis Baez, North American exploration manager at BG Group.

He noted that the Norwegian company has stakes in the Marcellus, Utica and Eagle Ford, as well as a huge position in the Bakken via its acquisition of small independent Brigham Exploration in 2011.

“Statoil is spread all over the Rockies doing exploration,” Baez said.

He noted also that ConocoPhillips is doing well after cutting its shale teeth on acreage attained by acquisition of independent Burlington Resources.

“That’s how they gained their expertise in the Eagle Ford,” he said. “They realized they needed to act like a nimble independent.

“They just (announced) increased reserves from 1.6 Bbo to 2.5 Bbo,” Baez noted. “That’s enough to change a whole country.”

It’s been reported that BP will split its onshore U.S. oil and gas segment into a separate business with the idea that a more focused and nimble unit will be better prepared to hold its own among the smaller independents. BP controls sizeable resources in the Eagle Ford and elsewhere.

Still, the names that stand out in the shale plays are companies like Apache, Anadarko, Range Resources, Newfield and Pioneer, among others. They are among the non-major companies that jumped in early-on for the most part and made it happen.

“In terms of being nimble, you may have better fracturing technology or a better understanding of an area that someone else doesn’t,” Baez said. “Being nimble in terms of getting in an area even when someone else is walking out isn’t a bad thing, either.

“Strategy is changing, concepts are evolving,” he noted.

“It’s important to understand the perspective of how other people are doing things, including strategy and technology innovations,” he emphasized, noting that this is one of the goals of the panel he will chair at the 2014 URTeC meeting.

Baez credits independents with creating a unique matrix of multidisciplinary integration, fit-for-purpose technologies, benchmark best practices and boots-on-the-ground execution to lead them to Tier I results.

Clouds Looming Over Shale

Well, you ask, are the shale operators set to move forward using cruise control?

The answer is clear if you have noticed the few storm clouds gathering on the horizon of all things shale.

Bloomberg News recently reported an analysis of 61 shale drillers revealed that shale debt has doubled during the last four years, while revenue has climbed a paltry 5.6 percent. This is despite the big move to liquids-rich and oil plays when natural gas prices cratered.

Initial production from shale wells often is gangbusters. But for completions that run true-to-form in most of the plays, this initial deluge tends to quickly dwindle precipitously.

In turn, operators overall must keep the drilling push going full speed, which might keep them running-in-place at best.

The interest incurred on the increasing debt load to finance this pricey activity can be burdensome, indeed.

And it’s said to be rising.

Independent Goodrich Petroleum is working diligently to prove up the potential for the complex Tuscaloosa Marine Shale to become an economical play. The jury is still out, while the company reportedly is trying to reduce its well costs to only $11.5 million each.

Certain companies (and their investors) are shrouded in a cloud of doubt over their ability to keep financing new wells as production dwindles in their existing wells.

Depending on their lease holdings, this could spell opportunity for larger producers with deep pockets who can deal with the cost to acquire their struggling brethren.

According to Steve Farris, chairman, CEO and president of Apache Corp., the following challenges are in store to continuing U.S. unconventional oil production growth:

♦ Capital spending must increase significantly.

As production grows, more capital is needed to offset declines. Also, international firms and private equity must continue to invest.

♦ New plays must be discovered.

In 2013, the Eagle Ford and Bakken yielded almost 70 percent of unconventional oil production.

♦ Capital efficiency must improve.

Reserves and production must go up, costs per well must go down.

♦ Water availability.

♦ Industry must find and retain the next generation of employees.

♦ Regulations must be balanced; industry must be part of the solution.

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