Shale Gas: The Advantages of Getting In Early

Treasure buried in the backyard

“Hopefully some of these ideas and concepts may be useful in the development of shale gas in Europe,” said Mike Simpson, General Manager, Unconventional Exploration, Global Exploration at Nexen Inc.

He talked about Early Mover Advantage in a World Class Shale Gas Play – Horn River Basin (in Canada) at the Global Shale Gas Forum in Berlin, Germany.

“But don’t go out and buy the stock on the basis of anything I say,” he quipped.

Simpson explained that Nexen had three areas of focus: oil sands, conventional and unconventional.

“Today our holdings comprise $15 billion. We’re in western Canada, in the deep water of the Gulf of Mexico and onshore in Yemen.”

He showed the audience a slide depicting how successful the Barnett shale had been in spreading shale gas throughout North America.

“Nexen started to notice the shale gas success in the US in the first years of the new millennium and started to pay particular attention in 2005,” explained Simpson. “We started taking a more serious look at unconventional, in that it was comparable to what we were looking at on the conventional side.”

He continued, “We identified 60 different formations in our own backyard that would have the potential to produce shale gas and high graded to 3-5 of the best shales, considering factors like access, markets, and opportunity/availability.”

Simpson said the reason Nexen wanted to be in the Horn River Basin, in the province of British Columbia, was because it had the mineral rights. “We identified several hundred TCFs of gas at the time, but were unsuccessful in our bidding in December of 2005. Prices were starting to escalate in May 2006, so in June we made a substantial land-posting request. The land got tied up very quickly, not to mention the escalation in price – double or triple what we had paid for it.”

Then, in February 2007, he said, Nexen spudded two vertical wells.

“In Canada, we like to think of it as the postal code of choice. If any of you are familiar with North American gas plays, this is one of the Top 5 if not the Top 3. It doubled our potential proved reserves, with 35,000 ha. and it can support 500-700 wells.”

He said that the attractive thing about northeast British Columbia is that land could be posted as licenses, and that by investing in upfront drilling shale gas operators could hold onto their land for 15 years.

“It was important that any venture like this would have some effect on the company,” said Simpson. “We diversified from essentially oil to gas through this.”

Simpson also spoke about “Various Horn River Strategies and Plans” and how his company had taken some chances.

“Of the first and early movers (Encana and Apache among them), all of them had significant US experience and felt comfortable going into this kind of play. Nexen had no experience, so it was a brave step by management.”

He said that companies typically consider their timing on entering shale gas plays. “We’re not averse to taking risks, but some companies like to get in later, like Exxon Mobil or ConocoPhillips. It’s a trade off.”

This was because shale gas plays are very capital intensive, like in British Columbia, according to Simpson.

“Wells and infrastructure are expensive, so you have to have staying power if you’re going to stay up there. At the time we got in there gas was at the $7-8 range. We asked ‘why can’t we export from the Horn River?’”

Now plans are underway at Nexen to export LNG to Asia, Simpson said.

He explained, “After we had acquired our lands in 2008 we ran through our strategic options: minimize our capital, let someone else take the risk, and focus on our near term production goals. You can turn on and off your production, somewhat, as you need it.”

Simpson said development of a capture land data focus was followed by a cost focus to decide whether Nexen should become the dominant player in the play or spend more time on technology and learning.

“We’ve developed a hybrid strategy, and as we developed our captured lands we gained enough confidence on the play to capture the additional aspects of that play. We branched out after our additional results, bought additional lands in Cordoba and Liard, which are extensions of the Horn River Basin, doubling our land position up to 120,000 hectares of land.”

He explained Nexen’s approach to risk on the play: “We essentially risked the chance of finding gas in place, and risked that that gas would be commercial. With our drilling activities we confirmed that the gas in place was there, and through testing of horizontals and verticals we essentially de-risked the technical aspects of this play.”

Now, said Simpson, an oversupply of natural gas was due to the success of shale gas production in the US.

“Now were focusing on cost – assessing our cost per frac with our drilling costs factored in. We were trying to gather more info than other companies in terms of experimentation and testing.”

He reported that drilling and completion of single stage fracs had come down drastically from $6 million, so that Nexen now planned on completing 18 fracs per well.

Simpson said that the British Columbian Oil and Gas Commission early on had recognized that it needed specific fiscal terms for unconventional gas. “They looked at similar packages to stimulate the shale gas business in British Columbia. The Net Profit Royalty program has stimulated it and made the play economic.” He explained, “It essentially equalizes the BC physical take with comparable plays in North America.”

Simpson said that involvement with communities around a shale play was crucial, and had advice for others.

“It’s no surprise that industry is quite aware, because it’s a potential showstopper. If you can’t operate in an area because of something you’ve done, or how you’re perceived, it can stop you in your tracks. You need to focus on the environment and communicate effects on the societal and economic environments –we’ve done that effectively,” he said of Nexen.

He described the Horn River Producers Group - a company driven initiative, formed to communicate with regulators and the communities affected by shale gas operations on the pros and the cons. “It may create jobs but also will have impact on the environment. It’s important that these groups go out and portray the situation as best they can.”

Simpson said the key success factors for the Horn River Basin operations included picking the right play and location as geography was as important as geology. “Getting in big is also important, capturing economies of scale. You need running room for learning, increasing chances you’ll find the sweet spot.”

Things you can control according to him include finding skilled, experienced exploration and development staff; execution: and focus on continually reducing costs and improving performance.

“It’s our large material land position and getting in early,” Simpson said of Nexen’s success. “If you’ve got a longer confidentiality period it gives you time to learn, gives you the opportunity for growth, and puts you in a position to be able to influence other stakeholders, like regulators.”

“According to the statistics,” he added, “Europe has twice the basins crammed into half the area. There definitely are real business opportunities for shale gas. But when you don’t have information you tend to be conservative.”

He contended that the European situation with shale gas is similar to what North America’s was a few years ago, but that that could change. “The biggest learning curve is on the commercial and above ground issues. There’s a limited service capacity but that’s going to change once things get off the ground.”

“We need information more than anything to understand what we have,” he said. “Get in big if you’re getting in and make sure that you align and or staff your company with experience.

“Above ground collaboration is important, stakeholder engagement should occur early and often. Put your emphasis on the socio-economic potential and any consequences on the development, or they could come to bite you later on.”

Simpson said that fiscal terms that provide economic returns would be important, as well as stimulating below ground competition, and adapting regulations for unconventional early on.

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