What Makes Shales a Success - A View from the Deal Desk
Pledging to discuss the lessons learnt in US shale gas development at Shale Gas Eastern Europe 2011 in Warsaw, Poland, Daniel G. Rathan, Director A&D at Tudor Pickering Holt & Co. expressed a bit of reservation about what his audience already knew about developing shales.
“Since I’ve been here in this conference today, I’ve seen you’re far up the learning curve. I hope there’s some value in looking back, but it’s impressive how far you’ve got at this early stage,” Rathan said of Poland.
“We hope to become more involved in M&A in European shales,” he said.
Rathan reported that Tudor, Pickering, Holt & Co., LLC, an integrated energy investment and merchant bank had worked a lot on the Eagle Ford shale play. He remarked, “The growth in this sector of the industry is just incredible. The Barnett shale had production in the early 90s, but the explosion of production happened in 2006 and each play is exponentially growing. We’re at about 7-800 trillion cubic feet of reserves, which is about 35 years of supply.”
He noted that the Haynesville and Marcellus were also very significant.
“In 2013, shale gas will make up 34% of gas production,” he said.
The biggest deal activity, according to Rathan, was in the Fayetteville in 2008. He said the Marcellus had peaked from a deal perspective in 2009: “That’s when we entered the marketplace providing strategic advice. This year we feel there will be a lot of activity in the Niobrara.”
He added, “We prioritize them according to the peak level of interest for our clients.’
Rathan said that in developing production of shales, there were two parts: 1) the nature part, which concerned the quality of the shale, and 2) the nurture part, which was all about applying technology to make them produce, “In applying lessons, understanding the geology, interpreting the logs and understanding the surface aspects of developing the shale play.”
His slide told that it was about “Maximizing the right characteristics,” namely, depth, thickness, porosity, TOCs, the pressure regime, etc. “These describe the natural aspects of the play,” he explained “and ultimately you move to certain areas of that play.”
Mr. Rathan spoke about joint venture activity in the Marcellus, including players like Total SA, BG Group and Statoil ASA. “The Canadians came a little later,” he recalled, “and more recently there has been Japanese and Chinese interest. Following them are the BRIC countries.”
He said that in the last six months Tudor Pickering Holt & Co had been very involved in a transactions in the Niobrara and Eagle Ford shale plays involving top Chinese offshore oil producer CNOOC Ltd and Chesapeake Energy Corp.
“They asked us to help them with the technical analysis and the ultimate deal structuring,” he explained. “Working with the Chinese one has an expectation that working with Asian countries can be a lengthy process, but these moved extremely quickly and that’s a critical requirement. In the Niobrara we conducted it on the basis of only two wells in the Powder River basin.”
According to Rathan, the attraction into the US shale plays was also from the perspective of the economics, not just from a learning perspective.
“We believe that the long term gas price will be $6 - the short term price ($4) is not realistic, for shale plays to provide attractive rates of return.”
He said activity was moving to more economic plays. “The sustainable gas price is about the midpoint of his chart,” Rathan showed. “That ultimately is where we expect the gas price to come back to. The shale plays is a good place for the operators to be.”
He noted the move into liquid rich plays. “In oily areas the rates of return are 50-100%. They are cropping up all over the country, signalling a big shift in activity.”
“The emerging plays, particularly the oily ones, have been rising with the rig count and companies are aggressively shifting their capital there. So the activity is shifting to the west, in places like the Niobrara and the Bakken. It’s just applying the same technologies,” he said.
Rathan discussed the value evolution of land acreage at places like Niobrara and emerging oil plays.
“You can’t sell these assets until you have plenty of science, plenty of logs of fracture stimulation,” he explained, “knowing how far out the fractures go. Seismic is extremely important information to build a position, and there’s constant evolution and learnings in this area.”
He explained that the Barnett shale provided a laboratory of sorts for learning. “We realized it wasn’t all equal,” he said of the shale. “A partner purchased the wrong acreage in the Barnett. We try to understand immediately where the sweet spots area.”
From an operational perspective, Rathan spoke of drilling in an urban environment. He showed a photograph of drilling being done right in a university at Fort Worth, saying it was doable via long laterals closely spaced, maximizing an area. He also spoke of stacked pad drilling.
He emphasized the importance of seismic for certain shale plays, like in the Barnett for avoiding the viola limestone in the Barnett, or skirting natural faults.
“Coupled with that is the application of microseismic to understand where we’re stimulating and where we’re not,” said Rathan. “It helps with the drainage area, therefore with spacing and completion optimization.”
He said that minimization of the surface footprint was receiving a lot of attention.
“Enormous quantities of proppant and water volume are required, he explained.
“You can gain a lot of resource out of one location, drilling 3000 foot laterals and achieving enormous quantities of resource from one location. The aim is stimulating as much rock volume as possible via the spacing of frack events.”
He continued: “Engineers are modifying the number of frack stages, and more proppant can lead to higher recovery. As we get longer laterals we get more stages and should get higher EURs. We think we can get a million barrels on a per well basis.”
Rathan posed the question whether too much money was being spent on completions. “It’s not a blind process doing more things,” he answered. “It’s doing things smarter.”
“The type of fluid you use can impact the kind of stimulation you have. We’re finding that a hybrid fluid treatment can give us the best of both worlds.”
A la the David Letterman Show in the US, Rathan offered up a “Top Ten List” of the factors that had made US shales a success.
“It began with identifying organic rich foreland sedimentary basins –understanding them was one of the first requirements,” he said. “It took decades of legacy vertical well drilling. Vertical well activity in the Barnett led to cracking the code.
Among others, he said that accessible and accommodating land owners were key, as well as a pragmatic and transparent regulatory environment, scientific advances in formation analysis, an investment climate attracted to energy, a declining domestic gas supply and high gas prices, advances in horizontal drilling, and isolated mult-stage fracking.
He said that so much had been learned in North America about this process.
In terms of land he offered advice: “Move early and gather both a contiguous and diverse position, to ensure you don’t miss a sweet spot.”
In terms of regulatory issues, he said: “Focus on areas with oil friendly regulatory regimes. Poland is going to be like the Oklahoma or Texas of the US. Once you’re there you should communicate, be transparent, having town halls and making the economic case.
“US O&Gs need to make their case much more forcefully,” added Rathan.
“Don’t skimp on science,” he said of technical issues. “Get cores, shale petrophysics, etc.”
“From a capital perspective, have a good balance sheet,” he encouraged. “Understand how to fund your company in an appropriate way through the debt markets, equity, non core asset sales, and through joint ventures to develop the plays and stay strong.”
In terms of operations, Rathan emphasized being flexible. “Rig mobility is important in the US, from the less competitive gas plays to the more, and now to the liquid rich plays. The ability of companies to move their operations around is important and we hope that in Europe there won’t be certification boundaries.”
“We’re trying to introduce European shales to American investors and that’s why we’ve just opened a London office,” reported Rathan of Tudor Pickering Holt & Co.. “As they start to place value on this they may decide to extend their activities outside of the US.”