Key criteria for shale oil
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Key Criteria for a Successful Shale Oil Business: - global factors, - project features, - project economics, - financial matters, - corporate matters
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Key criteria for shale oil
- 1. KEY CRITERIA FOR A SUCCESSFUL SHALE OIL BUSINESS
- 2. Shale Oil is different to Conven?onal Oil, but not like Mining either … • • • • • • • • • Mining has no recent enabling technology like horizontal drilling & fracking for shale oil Mine development is much further along the learning curve than shale oil development TransportaGon infrastructure and shore access is key for mining, not so much for shale oil Mining is autarkical, shale oil requires extensive services infrastructure Mining is a lumpy business, shale oil much more scalable Mining lead Gmes are much longer than shale oil Mine development cost depend on global macro factors and local labor cost, while shale oil development cost depend on capacity uGlizaGon levels of local well construcGon Mining (near/surface) requires exclusive land use, with shale oil land use is shared Mining is dominated by a few large players, shale oil is a fragmented industry So, if similariGes with mining are weak, what type of business is shale oil? SHALE OIL MATTERS …. Page 2
- 3. Shale Oil … global factors • • • • • • Young business with explosive growth in USA and a lot of learnings yet ahead 3.0 MMbopd US shale oil producGon in Nov 2013 from less than 0.5 MMbopd 5 years ago Was triggered by oil price rise plus technical enablers -‐ horizontal drilling & fracking Shale oil has aYracted many new players in addiGon to tradiGonal oilcos So far mostly in USA and Canada, with above ground factors impeding global expansion Most promising overseas is Vaca Muerta shale in ArgenGna and Bazhenov shale in Russia Shale oil may yet turn into a global oil market revoluGon – OPEC has taken note SHALE OIL MATTERS …. Page 3
- 4. Shale Oil … project features • • • • Shale oil development focus moving from “efficient wells” to “resource maximizaGon” • Efficient wells: faster wells, longer laterals, more frac stages and beYer frac efficiency • Resource max: lateral downspacing to ≈50 acres, frac stage opGmizaGon to ≈200 d, Shale oil development opGmizaGon via pilot projects, data mining and incremental improvements, as opposed to front end loading and numerical modeling for convent’l oil Cost drive via well manufacturing approach: pad drilling, rig walkers, zipper fracs, acreage uniGzaGon, supply logisGcs, spud-‐to-‐POP duraGon, use of natural gas Large remaining scope for improvements: verGcal placement of laterals, frac stages opGmizaGon, stress field examinaGon, resource drainage improvements, frac spread simplificaGon, drill & frac fluids recycling, frac propagaGon control, downhole monitoring Efficiency gains will be significant and will spread quickly amongst the players SHALE OIL MATTERS …. Page 4
- 5. Shale Oil … project economics • • • • • Very high incremental well IRRs and per well margins are key for shale oil success, while key to convenGonal oil is upfront managing of reservoir uncertainGes Scalable field development with early cash generaGon instead of lumpy long-‐lead projects Well NPVs need be discounted with much higher opportunity cost of capital, not WACC, in order to include the benefits of larger opportunity capture via faster capital recycling Focus for wells shided away from EUR to IP, as result of using the higher OCC Shale oil projects have significant natural hedge against oil price risk, as commodiGzed US onshore drilling day rates and per stage frac cost inversely correlated to well margins ConvenGonal oilcos struggle understanding the new shale oil business model. Their tradiGonal key strengths (front-‐end engineering/modeling, business processes and financial strength) are not a good fit for the shale oil challenges SHALE OIL MATTERS …. Page 5
- 6. Shale Oil … financial maMers • • • • • • • Early reserves booking crucial to raise debt finance Reserves booking greatly facilitated via well type curves, analogues, legacy wells Efficient working capital management imperaGve for high NPAT results Producing shale oil can be securiGzed, offering exposure to long-‐term inflaGon & oil prices Producing shale oil may be organized under MLPs, linking tax benefits with liquidity of traded securiGes Shale oil securiGzaGon or spin off into MLPs are efficient liquidity measures Onshore shale oil offers great scope for OPEX iniGaGves to add value to mature fields Shale oilcos must pay close aYenGon to capital markets (reserves, PR) and capital efficiency (allocaGon, recycling, OCC, tax) SHALE OIL MATTERS …. Page 6
- 7. Shale Oil … corporate maMers In the long run, I see two dominant types of shale oil players for early life and late life assets: 1. Shale oil developer – aggressive, innovaGve, savvy, private equity, capital focus, buy-‐to-‐sell 2. O&M manager – diligent, OPEX manager, publicly listed, opex focus, buy-‐to-‐hold Large tradiGonal oilcos more aYuned to the O&M phase and many have their war chests ready SHALE OIL MATTERS …. Page 7
- 8. Hence, what are the key success criteria for shale oil ? • • • • • • • • • • Young business – speed, flexibility and learnings are all-‐important Acreage based – loca?on is very important and how well and efficiently it is developed US centered – currently working shale oil outside the US amounts to “missing out” Shale oil is different – paramount to NOT apply the business logic for conven?onal oil Growth levers – via acquisi?ons and focus on capital markets & capital efficiency Jekyll & Hyde nature – 2 polarized owners over 2 very different phases over asset life cycle • Development phase – aggressive innovator, savvy development architect, no aMachments, focus on capital • O&M phase – diligent finisher, long-‐term commiMed, tweaking margins, focus on opex Oil prices – work with the natural hedge during development phase Alignments – private equity during development, services companies during O&M phase People – entrepreneurs during development, margin tweakers during O&M phase Timing – entry NOW for shale oil developers; don’t miss your stop, move to the next dvmnt SHALE OIL MATTERS …. Page 8
- 9. Any risks with shale oil ? • • • • • • Oil prices? …. No, would not worry about oil prices too much, unless for O&M managers: • Oil sands and DW offshore cannot compete with shale oil • There is a natural hedge during the shale oil development phase Compe??on? …. Yes, business entry barriers are much lower than for convenGonal oil Exit? …. Yes, important for shale oil developers not to miss the stop and to divest Shale gas? …. Yes, poses a significant risk to DEVEX, since it uses the same rigs and frac fleet Infla?on? …. Yes, for future O&M managers, trying to tweak the margins Environmental? .... Insignificant compared to offshore, sour gas or oil sands SHALE OIL MATTERS …. Page 9