In the exciting early days of the now-numerous shale plays, which have spread internationally, there was a tendency among some operators and others to think shale production would be a slam-dunk.
Grab a land position, drill some wells and prepare to count the greenbacks sure to follow.
In other words, these long known reservoir-sourcing rocks would automatically yield big volumes of hydrocarbons wherever a drill bit punched into them.
Over-the-top excitement can make you temporarily forget that nothing is simple in this industry.
“With the unconventional, it’s not a function of ‘if you find it, it will be profitable,’” said AAPG member Bill Haskett, senior principal-unconventional practice area leader at Houston-based Decision Strategies Inc. “The unconventional, while not dominated by resource uncertainty, is dominated by resource productivity uncertainty.
“The ability to enter or exit unconventional plays in a manner that creates material opportunity and value for a company is more than luck,” he noted.
“You have to be ‘material’ in what you’re doing.”
Haskett outlined the meaning of materiality in the context of hydrocarbons:
- How much presence do you need to make the opportunity worthwhile and control your own destiny?
- How much acreage will make the purchase worth the cost, effort and risk?
- How much will ensure leverage to achieve your business goals efficiently?
- The bottom line here is that you must define up front what it is that makes you material – or not.
Haskett pointed to a group of medical professionals holding more than 3,000 acres of “decent land” in the Marcellus play via an investment group – and he emphasized that simply holding onto this pricey big chunk of land, particularly where there is no infrastructure, is not material.
“A lot of companies,” he asserted, “find themselves in plays with no forethought about what they’re trying to achieve.”
Who’s In Charge?
Haskett’s suggestion: Your mantra must be Plan, Plan, Plan.
For starters, you can time your entry into a play to best take advantage of the three periods of frenzied activity in new unconventional plays, or what Haskett dubs the Three Frenzies:
- Frenzy #1: Someone has an idea and can’t keep it quiet, so the idea happens and people pick up what they think is prime land. A mini-boom occurs.
- Frenzy #2: Proof of concept is shown, and the remaining land gets snapped up quickly by companies of various sizes.
- Frenzy #3: Latecomers, particularly international entities, typically fork over the big bucks to buy entry via asset purchases or even whole companies.
Whether or not to buy in the midst of a frenzy is play-specific, according to Haskett. Much depends on the business pinch points, i.e. those scarce resources that companies will compete for, e.g. product takeaway infrastructure.
There’s a need to look at productivity but also to have a full value-chain approach to identify where the business pinch points are early on.
“Companies are advantaged by carrying out value-of-control studies, where you assess what it takes to control an uncertainty, like liquids egress, liquids stripping,” he said. “How much would it take to control that business pinch point that all are competing for, or will eventually compete for?
“You will either control your own destiny, or someone else will,” Haskett cautioned. “Destiny will be controlled.”
A Competitive Advantage
Along with other examples, Haskett cited the Marcellus Shale play, noting there was a problem of what to do with the liquids given there were few product lines.
“The companies that saw this early on started looking right away at the business pinch points of liquids extraction, liquids handling,” Haskett said, “and this set them up with a competitive advantage.
“Other companies have to deal with the controllers of the business pinch points to get their product to market,” he continued. “As soon as you’re controlling the assets of other companies, you start to take their profits.
“That’s very high level.”
He emphasized that a strategic decision-based materiality approach to play entry and exit decisions allows you to prioritize what you’re chasing, how much you’re chasing and when you’re chasing it.
This MO goes right to the heart of competitive advantage.
“Strategy forces you to take a look at the bigger picture in the context of what you can do,” Haskett said, “and the details particular to an area.
“If you know upon entry when you’re going to exit a play, it makes it a lot easier to figure what you need to control and how you’re going to control it,” he said.
“If you have a strategic approach, you are well-coordinated and pull out the value and the volume,” he emphasized. “But if you just go in to see what you can do, someone else will get the profit.
“The profit’s there; it’s just a question of who gets it.”