Changing times usher in next phase for shale

It has now been 21 years since I attended the very first NAPE expo, a marketplace for buying and selling oil and gas prospects and producing properties. Over the past two decades, the expo has grown twenty-fold, and a lot has changed in terms of how deals are bought and sold, and what it takes to make money in the upstream industry.

At a macro level, volatile oil prices dipped to five-year lows toward the end of 2014, and the new year has seen continued turmoil. E&P companies and service providers are working hard to find cost equilibriums to improve drilling economics which will determine near-term activity level within our industry.  With the current outlook, everyone is looking for ways to enhance drilling, completion and personnel efficiencies. Plus, an increasingly unpredictable, global marketplace tells us that the old adage—the only constant is change—will continue to ring true. This sentiment was echoed last December in Denver by NAPE Business Conference keynote speaker and Noble Energy Chairman Chuck Davidson, when he encouraged industry to plan for the long term but noted that “every time we get comfortable projecting the future, something changes.”

Certainly, the upstream industry has been through a significant season of change in recent years, particularly with regard to the U.S. shale boom. Yet, we are also seeing a dramatic shift as it relates to E&P economics, as these plays are developed.

We’ve been focused, as an industry, on finding shale plays. I’ll wager that we’ve now discovered more plays than we can develop in the next 20 years. 

The amount of capital, manpower and equipment behind the unconventional revolution is staggering. Consider what it takes to fund horizontal development on a single section of land, measured at 640 acres (equal to one mi²). That roughly 1 mi-by-1 mi parcel of land might be comprised of six horizontal laterals, and—as is the case in many plays—has two to five productive benches warranting development. By my calculation, that easily demands about $126 million in capital to develop three benches in just 1 mi² at $7MM/lateral. Further, to increase overall recoveries and utilize positive frac interference, you might not start flowback (cash flow) on the first well until you have drilled, completed and fraced the nine or more neighboring wells. It’s an ongoing manufacturing process to get the highest recoveries, and when you add it all up, these kinds of numbers change the whole dynamic of the industry.

While these changing economics present mounting challenges, the nimble will emerge from this time of transition using one of several strategies.

THINK GLOBALLY

While geopolitics make for uncertainty, the U.S. has the edge when it comes to technology, infrastructure, know-how and a proven track record of success in identifying and developing unconventionals. At recent NAPE expos, we’ve seen a tremendous increase in international attendance, and interest in deal-making from other countries. I expect that trend to increase this year.

Whether they are hoping to look under the hood of our operations, or to put their investments to work where they’ll have a better shot at reliable returns, these investors are ripe and ready to provide the capital needed to fund development of the unconventional reserves that we’ve already identified.

BRINGING THE BIG BOYS BACK

Many of the majors and large independents have been lured offshore and overseas, looking for projects with scale to deploy their operational capital and manpower. Now, with the transformation of our domestic U.S. industry attributed to the shale revolution, these large operators are especially well-suited to tackling the manufacturing phase of these mammoth developments, given their access to capital, operational logistics and long-term development focus. NAPE and similar expos exist to pair such players with the underfunded independents, who accomplished the early heavy lifting.

PRIVATE EQUITY

Taking a new approach to the role played by private equity firms is another domino just waiting to be knocked down. Private equity has been backing the relatively short-term capital needs of independents for years. Their emphasis has been on funding the identification and early delineation of E&P opportunities. It has, traditionally, been higher-risk investments, with even higher rates of return for the private equity money, depending on the success of the management team. Now that we've discovered plenty of shale plays, the opportunity for industry, and its private equity partners, is to find ways to redirect that capital. For the larger investments needed to develop all of these plays, private equity will surely get in on much more reliable and longer-term returns.

GO BIG

There’s a lot of money in institutional investment houses and pension funds. Unconventionals are exactly the kind of money-maker that these organizations can get their arms around. To get them, and their capital, onboard, the industry needs to teach them how shale plays deliver the kind of financial return, repetitive results and passive revenue that they crave. 

Not all of these approaches will work for every company seeking funding to develop the plays found in recent years. However, each represents an opportunity to overcome the higher capital needs of today’s multi-well, multi-bench prospects. It might be a season of change, but there is still plenty of opportunity.