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US Shale: Winning in a volatile environment Jonathan Garrett October 2016
US Shale: Winning in a volatile environment
Jonathan Garrett
October 2016
With over 900 clients globally, we cover a number of areas and expertise.
We work with strategy and policy makers, business developers and market analysts, corporate finance, risk teams and investors, and are recognised as a leading authority by the press, regularly quoted in business publications and industry journals.
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The Permian has been the center of the oil and gas universe
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Anadarko2% Central
Basin Platform
1%
Gulf Coast15%
Delaware29%Denver-
Julesberg10%
Midland28%
San Juan1%
San Joaquin
5%
Williston9%
Source: Wood Mackenzie North America Company Play Analysis Tool
Is it really all about the Permian when we consider to largest, low cost resource?
Sub-$60/bbl BE Locations by Geography Will inventory exhaustion become an issue?
� Plenty of US operators have the option to drill NPV-positive tight oil wells today, but as the recovery slowly builds, which companies can continue to drill economic assets?
� High-return sweet spots shrank massively during the past two years as prices moved lower.
» There could be additional downside risk to the sustainability of developments that are in the money today.
� Service costs will eventually rise, and reservoir drainage will increase
» Both will put upward pressure on today's historically low tight oil breakevens.
� Growth companies with large undrilled Delaware and Midland positions are indeed in a position of strength.
» The market is rewarding this, but many companies are not capitalised well enough to actually turn all their acreage into cashflow.
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Q2 2016 results: the cycle is starting to turn for onshore US players
� Early signs that the US E&P investment cycle is bottoming out
» Some budgets nudged up and activity will increase in H2; but general mood is one of caution
» Our take: several quarters of US$55-60/bbl oil will be needed for a sector-wide return to investment-led growth; EOG and Pioneer have standout self-funded growth prospects.
� Onshore drilling and completion and operating costs still trending down
» Cost deflation and project re-optimisation have cut capex on new FIDs by 10-30%
» Our take: cost deflation may have further to run and could surprise on the upside into 2017.
� M&A-led portfolio repositioning accelerating
» More players buying into the low end of the global cost curve
» US Independents strengthening core positions and finances with non-core US asset sales
» Equity currency is being used to fund consolidation
» Our take: portfolio repositioning and, for some, the need to free up capital will continue to fuel the M&A market. Tight oil will remain the focus of activity.
Rig gains are showing momentum, and other variables are also signaling a better 2017
Source: Wood Mackenzie
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Returning rigs first slow Lower 48 decline, then provide new growth
Supply recovery levered to the Permian, and lower prices actually increases the region’s importance
0
100
200
300
400
500
600
700
800
900
1000
5.0
5.5
6.0
6.5
7.0
7.5
8.0
L4
8 h
ori
zo
nta
l o
il r
igs
L4
8 c
rud
e p
rod
uc
tio
n (
mil
lio
n b
/d)
$70 Case Base Case$45 Case $30 Case$30 plus shut-ins $30 Case$45 Case $70 CaseBase Case
Forecast
This base case assumes no OPEC cuts throughthe duration of the forecast
Range of outcomes between $30 & $70 (WTI) Long-term Lower 48 forecast
0
2
4
6
8
10
12
201
6
201
8
202
0
202
2
202
4
202
6
202
8
203
0
203
2
203
4
Oil
pro
du
cti
on
(m
illi
on
b/d
)
Conventional Mid-Continent Bakken
Barnett Bone Spring Eagle Ford
Haynesville Niobrara Re-frac/EOR
Marcellus Utica Wolfcamp
Source: Wood Mackenzie – Upstream Service
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Drilled UnCompleted wells (DUCs) mitigate declines do not match the dramatic reduction in rig count; location and timing matterWe forecast 1,700 abnormal DUCs contribute 250,000 b/d to supply by the end of 2016
Decline in DUC inventory DUC contribution to supply
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Ab
no
rma
l D
UC
co
un
t
Bakken Eagle Ford
Haynesville Marcellus
Utica Wolfcamp/Bone Spring
Source: Wood Mackenzie
0
100
200
300
400
500
600
Oil
Pro
du
cti
on
(m
bo
d)
Eagle Ford Bakken Wolfcamp
Bone Spring Utica Haynseville
Marcellus
Source: Wood Mackenzie
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Bakken EUR heat map
Bakken EUR heat map
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10
0
200
400
600
800
1,000
1,200
0
50
100
150
200
250
300
Jun-1
4
Sep-1
4
De
c-14
Ma
r-1
5
Jun-1
5
Sep-1
5
De
c-15
Ma
r-1
6
Jun-1
6
Uncom
ple
ted w
ell b
acklo
g
Month
ly N
D w
ell
com
ple
tions
Completions Uncompleted wells
Source: Wood Mackenzie, NDIC
North Dakota uncompleted well backlog Steady production, low completion
DUCs on the rise
With 887 DUCs as of June 2016, the Bakken continues to lead all other unconventional plays in the backlog of drilled but uncompleted wells.
During the second half of 2016, operators expect to whittle down their DUC backlogs in light of higher oil prices.
The number of completions has gone down on average 47% from 2015 to 2016, though production has only decreased by 8%.
Completions counts are highly variable in North Dakota as weather, namely high-winds and spring thaw, greatly impact activity levels.
-
50
100
150
200
250
300
(80)
(60)
(40)
(20)
-
20
40
60
80
Feb
-14
Ma
y-1
4
Aug-1
4
No
v-14
Feb
-15
Ma
y-1
5
Aug-1
5
No
v-15
Feb
-16
Ma
y-1
6
Well c
om
ple
tions
Month
ly p
roductio
n c
hange (
‘000 b
/d)
Completions Monthly production change
Source: Wood Mackenzie, NDIC
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Technology works to address costs and volumes; a doubly effective strategy if operators and service companies can both succeedOFS delivers better tools, while producers high-grade acreage and improve execution.
COST
BOE
Enhanced
Completions
More effective reservoir
stimulation
DrillingOptimization
Fewer drilling
days less labor
ReservoirManagement
Decline curveand proppant
detection gains
Supply Chain
Management
Removal ofduplicate costs
Pad drilling & rig
automation
Geo-steering & slim hole
Higher resolution reservoir mapping
Choking
Diverters
Concentrated cluster spacing
More sand & water
Water recycling
Self-sourced sand & facility optimisation
Source: Wood Mackenzie
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Drilling Optimization
� Geo-steering allows to stay in targeted zone while drilling which results in significantly higher production rates. MWD/LWD tools and advanced bit placement technology enables operators to be more precise during the drilling process without sacrificing speed.
� Advanced bit technology consists of modern bits that are made from ultra-durable materials which require fewer replacements. Conical-shaped elements concentrate more force into the rock than traditional PDC cutters which shear the rock instead.
Reduction in drilling days, costs and execution
Source: Smith Bits- Schlumberger
Source: AAPG
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Enhanced Completions
� Slickwater completions uses plain water and friction reducers to deliver proppant into the formation. Since slickwater is a relatively poor transporter of proppant, proppant remains in zone and concentrated within the target area. Out of zone proppant delivery may result in accessing areas of high water-cut or hydrogen sulfide.
� Plug and perf with cemented liner completions are more flexible and allow for pressure pumping to be concentrated on specific sections along the lateral. Plug and perf is better suited to accommodate more perforation clusters per stage, increasing reservoir contact with the wellbore.
Cheaper & improved completions will decrease cost and increase barrels
Source: American oil and gas reporter
Source: Drilling contractor
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� Proppant – white sand has proved to be as resilient as ceramic proppant under high pressure. Usage of smaller proppant sizes, namely 100 mesh, is increasing in order to prop open smaller fractures which may have been bypassed in the past
� New Generation Proppants/Chemicals –
» Biodegradable diversion agent
» Composite pill
» Self suspending proppant
� Expandable Liners are used for isolating fracture stages to improve rock stimulation and isolate non-productive zones
Cheaper & improved completions will decrease cost and increase barrels
Enhanced Completions
Source: Hexion
Source: Halliburton Source: Santrol
Source: Enventure
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There are recent examples of unconventional gas assets being accepted by investors again
Range acquires MRD for Deep Cotton Valley Terryville & Devon sells a Cotton Valley
portfolio with horizontal potential.
PE backing gas-specific teams with gas-specific funds. Examples in Piceance, Mid-
continent, and Eagle Ford.
Barnett assets transacting, with opportunistic midstream renegotiations
enabling buyers to create arbitrage.
Marcellus and Utica pure play operators looking to enhance positions through bolt-on acreage.
Acreage rationalisation is occurring in gas-heavy plays like Wattenberg
too. Synergy builds even more scale.
Source: Wood Mackenzie
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Jonathan Garrett
� Jonathan currently works on the US Lower 48 Upstream Research team, focusing on the Rocky Mountains and Northeast regions. Jonathan specializes in decline curve analysis, economic modelling, and onshore asset valuation. Recent work includes studying Bakken operator activity, production trends, crude export capacity and enhanced completions.
� Prior to joining Wood Mackenzie, Jonathan worked for Schlumberger, both as an offshore field engineer and in completions product development. Jonathan’s work mainly focused on reservoir monitoring and control.
� Jonathan holds MSE and BSE degrees in Industrial and Operations Engineering from the University of Michigan.
Principal Analyst – Lower 48 Upstream Research
T +1 713 470 1685
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Disclaimer
� This report has been prepared by Wood Mackenzie Limited in September 2016. The report is intended solely for the benefit of its reader and its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie’s prior written permission.
� The information upon which this report is based has either been supplied to us by industry or comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them.
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