US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the...
Transcript of US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the...
US Lower 48: What’s behind
the competitive cost curve?
Robert Clarke
October 2016
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Presentation contents
Cycle is turning
Some operators are now guiding for
production growth.
Undrilled inventory grows with
technology-led EUR improvements.
Future activity scenarios
Rigs bottomed in late spring, and
200 could be added by end-2017.
Production trough lags by 6-8
months. The Permian mutes the
decline & then drives the rebound.
Efficiency, efficiency…
A powerful combination of lower
unit costs and better recovery has
lowered breakevens to economic
levels. There is a wide spread
among operators though.
Technology drivers
The ability to better map reservoirs,
design completions, and optimise
production all stemmed from a
slower pace of activity. Diverter
advancements are important.
The latest cost curve
The largest changes are seen in
assets that breakeven between
US$35 and US$50/bbl.
Future wells are delayed, not
removed. Assets that receive
attention show the largest delta.
Let’s not forget gas
Opportunities abound for long
investors to capitalise.
Assets are migrating to businesses
better suited to manage the upside.
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Source: Wood Mackenzie GEM
Eagle Ford,
US$8.6Bn
Niobrara,
US$1.9Bn
Utica,
US$1.8Bn
Marcellus,
US$4.2Bn Midland Basin,
US$6.7Bn
Delaware
Basin,
US$6.3Bn
Bakken/
Three Forks,
US$3.6Bn
Haynesville/CV,
US$1.9Bn
SCOOP/STACK
, US$2.5Bn
2016 capex by modelled company key play Capex over time
Reduced 2016 spending for Woodmac modelled companies…
-40%
-20%
0%
20%
40%
60%
80%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Bakken
/Th
ree F
ork
s
Ea
gle
Fo
rd
Uti
ca
Marc
ellu
s
SC
OO
P/S
TA
CK
/Ca
na
Ha
yn
es
ville
/CV
Nio
bra
ra
Mid
lan
d B
as
in
De
law
are
Ba
sin
Cap
ex (
US$
Bill
ion
)
2015 capex 2016 capex
2017 % reduction
Source: Wood Mackenzie North American Play Company Analysis Tool
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…..but H2 may yield revisions as cost of supply finds a new bottom
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-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-500
-400
-300
-200
-100
0
100
200
300
400
500
So
uth
we
ste
rn
De
vo
n
En
can
a
Oc
cid
en
tal
Ne
wfi
eld
Mu
rph
y O
il
Lu
nd
in
Ca
bo
t
Pio
ne
er
Ce
no
vu
s
Fre
ep
ort
-Mc
Mo
Ra
n
Ma
rath
on
Co
no
co
Ph
illip
s
He
ss
Sta
toil
Sh
ell C
han
ge
in
201
6 c
ap
ex
gu
idan
ce
(%
)
Ch
an
ge
in
201
6 c
ap
ex
gu
idan
ce
(U
S$
mil
lio
n)
Conglomerate Diversified IndependentFocused International Focused CanadianFocused US MajorChange in guidance Q2 vs Q1
100%
- US$2 bn - US$1 bn
Select US Independents are nudging budgets up already
Cost cutting still remains an industry theme for many though.
2016 latest upstream guidance vs 2015 spend Change in 2016 budget announced in Q2 2016
Source: Company Reports. Wood Mackenzie
Southwestern: doubled capex spend as it moves
from zero rigs to five rigs by end-Q3
Devon: >US$200 million increase in 2016 spend
to be allocated to the STACK and Delaware Basin
Encana: allocating 75% of incremental spend to
the Permian, adding a rig for the balance of 2016
Newfield: roughly a 12% increase to fund STACK
activity, also supported by its Eagle Ford sale
COP: trimmed the 2016 budget a further 4% –
spend now 68% lower than 2014
Hess: “lean” principles reducing costs and
improving efficiencies
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Focusing on oil, can the US fill the impending supply gap?
2020 supply gap (mmb/d) Breakeven tranche & asset type (mmb/d)
75
80
85
90
95
100
0
2
4
6
8
10
12
Supply gap Reservesgrowth
Yet-to-find Plannedprojects
<$40
Plannedprojects
>$40<$60
Plannedprojects
>$60<$80
Otherdiscoveries
OPECcapacityincrease
Oil Sands
Onshore
Shallow water
Deepwater
US Tight Oil
Source: Wood Mackenzie – Macro Oils Service
Despite a range of breakevens, tight oil projects play a significant role.
Visible new projects under
current development plans
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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
L48
ho
rizo
nta
l o
il r
igs
L48
cru
de
pro
du
cti
on
(m
illi
on
b/d
)
$70 Case Base Case
$45 Case $30 Case
$30 plus shut-ins $30 Case
$45 Case $70 Case
Base Case
Forecast
This base case assumes no OPEC cuts through
the 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 matter
We 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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Efficiency gains: nothing shy of incredible…should we be surprised?
GoM did very well after the Macondo moratorium & tight oil followed suit
Lower 48 tight oil EUR trends – all regions GoM discovery trends – pre and post Macondo
0
2
4
6
8
10
12
14
16
18
20
0
20
40
60
80
100
120
140
160
180
200
2004 2007 2010 2013 2016
Dis
co
ve
ry C
ou
nt
Ave
rag
e R
ec
ove
rab
le R
es
erv
es
(m
mb
oe
)
Average Recoverable Reserves Discovery Count
Source: Wood Mackenzie Upstream Data Tool
0
0.1
0.2
0.3
0.4
0.5
0.6
2011 2012 2013 2014 2015
mm
bo
e
Gas NGLs Oil/Condensate
Source: Wood Mackenzie North America Well Analysis Tool
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Well Cost Assumptions
Economics
Drilling efficiency example: Parsley Energy (PE) in the Permian
Pad drilling helped minimise year 1 cash impairment, dropping breakeven by US$10/bbl
Assumptions Southern Fairway
Average Well Reduced Cost Well
Total cost (US$MM)
Drilling (US$MM)
7.04
2.30
5.34
1.40
Results Southern Fairway
Average Well Reduced Cost Well
NPV (US$MM) 0.63 1.89
IRR (%) 12.36 20.32
Cost/BOE (US$/boe) 18.73 15.29
Brent Breakeven
(US$/bbl)
58.81 47.70
Pre-Tax Cash Flow
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
2015 2025 2035 2045
Ca
sh
Flo
w (
US
$M
)
Reduced Cost Well Average Well
Source: Wood Mackenzie GEM
Parsley energy reported that it achieved a
lower well cost by introducing Pad drilling
to its southern Midland Wolfcamp acreage.
» Best case had a D&C cost of nearly US$
4.5 million.
Applying the same D&C cost to our
average Wolfcamp Southern Fairway
model, well NPV triples.
» The production profile was kept constant.
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How much more will efficiency provide? It’s difficult to quantify fully.
As rigs are added back to non-core areas, increases may not be sustainable.
Bakken IP rates Bakken drilling days
15
20
25
30
35
40
45
50
2011 2012 2013 2014 2015
Dri
llin
g d
ays
Dunn County Fort Berthold
Nesson Anticline North Williston
Northern Mountrail Parshall-Sanish
Southern Bakken Fringe West McKenzie
West Nesson Williams Core
Williams Perimeter
0
2
4
6
8
10
12
14
2010 2011 2012 2013 2014 2015 2016
18
0 d
ay I
P r
ate
/la
tera
l le
ng
th (
bb
l/fe
et)
Bakken Dunn County
Elm Coulee Fort Berthold
Montana Frontier Nesson Anticline
North Williston Northern Mountrail
Parshall-Sanish West McKenzie
West Nesson Williams Core
Williams Perimeter
Source: Wood Mackenzie North American Well Analysis Tool
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Technology works to address costs and volumes; a doubly effective
strategy if operators and service companies can both succeed
OFS delivers better tools, while producers high-grade acreage and improve execution.
COST
BOE
Enhanced Completions
More effective
reservoir
stimulation
Drilling
Optimization
Fewer drilling
days less labor
Reservoir
Management
Decline curve
and proppant
detection gains
Supply Chain
Management
Removal of
duplicate 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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$20
$25
$30
$35
$40
$45
$50
$55
$60
- 5,000 10,000 15,000 20,000 25,000 30,000
WT
I B
rea
ke
ve
n a
t 1
0%
IR
R (
US
$/b
bl)
Cumulative Undrilled Commercial Resource (million bbls)
1Q2016 Data 3Q2015 Data
1Q2015 Data 3Q2016 Data
Removing anomalies, the current
curve is the lowest it’s ever been
Progression of the US oil supply curve
Truncated at 30 billion barrels to emphasise the shifts in the lowest cost section
New cumulative liquids resource by breakeven for US assets
Source: Wood Mackenzie – Lower 48 GEM
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Low cost asset evolution: Permian decline curves EURs have improved by 20% on average
0
50
100
150
200
250
300
350
0
50
100
150
200
250
300
350
400
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Cu
mu
lati
ve p
rod
ucti
on
(m
bo
e)
Pro
du
cti
on
(b
oe/d
)
Months online
Oil (b/d)
NGL (b/d)
Dry gas (boe/d)
Cum. Production (Mboe)
Prev. Update Cum. Production (Mboe)
IP 30 (boe/d) 1,047
180 day cum (mboe) 91
EUR (mboe) 700
Breakeven oil price (US$/bbl) $38.21
Prev. Breakeven oil price (US$/bbl) $64.20
Decline Curve Analytics & Breakevens
47% 20%
33%
72%
14%
14%
Oil NGL Gas
% Revenue
% EUR
Western Fairway Reeves Core
% Revenue
59% 16%
25%
80%
10%
10%
Oil NGL Gas
Source: Wood Mackenzie
% EUR
IP 30 (boe/d) 965
180 day cum (mboe) 128
EUR (mboe) 938
Breakeven oil price (US$/bbl) $37.27
Prev. Breakeven oil price (US$/bbl) $58.16
Decline Curve Analytics & Breakevens
0
50
100
150
200
250
300
350
0
50
100
150
200
250
300
350
400
450
500
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Cu
mu
lati
ve p
rod
ucti
on
(m
bo
e)
Pro
du
cti
on
(b
oe/d
)
Months online
Oil (b/d)NGL (b/d)Dry gas (boe/d)Cum. Production (Mboe)Prev. Update Cum. Production (Mboe)
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Anadarko 2% Central
Basin Platform
1%
Gulf Coast 15%
Delaware 29% Denver-
Julesberg 10%
Midland 28%
San Juan 1%
San Joaquin
5%
Williston 9%
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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US E&Ps have never really acted in concert though, and there are
recent examples of gas assets being accepted by investors
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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After the Marcellus and Utica, the Haynesville and Mid-Continent
assets represent the next best L48 economic gas regions
Nearly 85 tcf of commercial resource exclusive of the Marcellus and Utica generates
positive returns at $3.00/mcf gas
Non-Northeast gas breakevens Non-Northeast gas resource competitiveness
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Hayn
es
vil
le
Mid
-Co
nti
ne
nt
Barn
ett
Gre
ate
r G
ree
nR
iver
Fa
ye
ttev
ille
Co
tto
n V
all
ey
San
Ju
an
Pic
ean
ce
Re
ma
inin
g c
om
me
rcia
l g
as
re
so
urc
e (
bc
f)
< $2.00 $2.00 - $2.50
$2.50 - $3.00 $3.00 - $3.50
$4.00 - $4.50 3.50 - $4.00
> $4.50
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Hayn
es
vil
le
Gre
ate
r G
ree
nR
iver
Barn
ett
Faye
ttev
ille
Pic
ean
ce
Mid
-Co
nti
ne
nt
San
Ju
an
Eag
le F
ord
Hen
ry H
ub
Bre
ak
eve
n (
US
$/m
cf)
Source: Wood Mackenzie
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$2.56/mcf
$2.80/mcf $2.49/mcf
$4.35/mcf
$3.71/mcf
$3.08/mcf
$3.05/mcf
Green: Breakeven decreased since 2014
Red: Breakeven increased since 2014
Haynesville breakeven metrics are falling and M&A activity is
rising. Continue to watch the private buyers.
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0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
4 5 6 7 8 9 10
An
nu
al
Ind
ex
ed
Pro
du
cti
on
Production Year
Austin Chalk Barnett
Cotton Valley Fayetteville
Haynesville Piceance
8% terminal decline 10% terminal decline
0%
35%
70%
105%
140%Cotton Valley
Haynesville
Barnett
Piceance
Fayetteville
Austin Chalk
Improvement on New Well NPV
Improvement on Mature Well NPV
As public E&Ps continue to shed non-core, mature gas assets, field
rejuvenation specialist are ready to capitalise. Some will generate upside through the drill bit, others through production operations
Benchmarked terminal decline rates Buyer upside – 20% OPEX cut and 20% revenue lift
Source: Wood Mackenzie North America Well Analysis Tool, Wood Mackenzie GEM
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Mature assets have a wide range of vales, with gas presenting the
cheapest average acquisition option
Play value benchmarking for flowing volumes
$11,600
$29,200
$41,200
$13,500
$17,200
$39,100
$41,000
$32,600 $31,400
$22,200
$15,500
$40,700
0
20,000
40,000
60,000
80,000
100,000M
arc
ellu
s
Eagle
Fo
rd
Wolfca
mp
Utica
Ha
yn
esvill
e
Bone
Sp
ring
Bakke
n
Mis
sis
sip
pia
n
Nio
bra
ra
Wood
ford
Barn
ett
Thre
e F
ork
s
NP
V10 o
f fl
ow
ing
pro
du
cti
on
(U
S$ p
er
bo
e/d
)
$ per boe/d Weighted average $ per boe/d
Source: Wood Mackenzie Global Economic Model
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In closing, despite incredibly strong headwinds, the US onshore
sector has found a way to function in a symbiotic relationship
Low cost tight oil
provides
opportunities for
many public E&Ps to
continue running
their business and
protecting investors.
In many cases that
has to be done by
selling “non-core”
assets. Private
operators are often
willing to buy these
gas projects.
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24
Robert Clarke
Robert G. Clarke has been with Wood Mackenzie since 2005, originally as a member of the company’s
initial US Lower 48 Upstream Research group in Houston. He has covered both the Rocky Mountains
and Gulf Coast regions specifically, and led much of Wood Mackenzie’s early shale research. He
product managed the Global Unconventional Play Service from 2009 to 2014, and also manages an
internal upstream Knowledge Network. Now, he works closely with US E&Ps, investors, and service
companies in the North Texas market.
Robert’s specializations include geologic play description, decline curve analysis, production forecasting,
analogue play modelling, and economic benchmarking. He has widespread experience analysing
exploratory global unconventional assets and has worked on upstream consulting projects, ranging from
asset opportunity screenings for E&Ps, to due diligence work for private equity M&A. Robert regularly
contributes to written media and is a frequent speaker and panel moderator at industry conferences.
Prior to joining Wood Mackenzie, he worked as a Field Geologist for HMI, a private engineering and
consulting firm in Houston, Texas. Robert graduated Cum Laude from Texas A&M University in 2001
with a BA in Geology, and received a MBA in 2005 from the Eller College of Management at the
University of Arizona.
Research Director – Lower 48 Upstream
T +1 214 513 9222
@RobertClarke_WM
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Disclaimer
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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
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