Delivered The. Calgary, Alberta April 27, James K. Gray

Transcription

1 Change and Opportunity Delivered to The Canadian Association of Petroleum Landmen Calgary, Alberta April 27, 2017 James K. Gray

2

3 Change & Opportunity Delivered to the Canadian Association of Petroleum Landmen Annual General Meeting April 27, Background and Definitions (Explain) Resources & Reserves Resource Triangle (Fig#1) Conventional Reservoirs (Accumulations) Vertical technology 4 5 million vertical wells drilled in the US & Canada Pre 2005 production essentially all vertical Unconventional Resources Plays Horizontal technology ±95% drilling last 10 years Post 2005 production growth essentially all horizontal 2. Unconventional Resource Plays NA distribution (Fig#2) Magnitude: enormous, unconventional reservoirs, dwarf conventional reservoirs in their physical size. One expert, a close friend who has spent a professional lifetime studying unconventional reservoirs, believes that they are as much as 1,000 times bigger than conventional reservoirs. Quality: Unconventional reservoirs are, by definition, tight reservoirs in, or adjacent to, and including mud rock source beds. Production from these beds is predominantly light crude oil, i.e., API, and both natural gas and natural gas liquids.quality: 3. Technology (Fig#3) Vertical constrained due to limited rockface Horizontal unconstrained; continuous improvements, ongoing due to thousands of feet of rock surface 4. US (NA) Unconventional Industry North America, particularly the US, is the only place on the globe where all the tools needed to effectively and rapidly exploit and develop our unconventional energy riches are immediately available: Interdisciplinary teams Latest research, technology and fast adaptation State of the Art 3 D seismic Infrastructure (roads, pipelines, etc.) and available markets Required drilling and fraccing equipment Lowest cost operations (US) Land tenure and land availability Available financial support Political and regulatory support Entrepreneurial competition Private sector driven Despite having only approximately 15% of the globe s unconventional resources, the US has a world leading ability to exploit and develop those resources via its extensive infrastructure, generally favorable regulatory and social license, and deep technical talent pools. This combination of factors could result in the US achieving a dominant position in both global crude oil and natural gas markets in just a few years. We are all familiar with the spectacular growth in both oil and natural gas production in the US with the introduction, in 2005/06, of horizontal drilling and multi staged fraccing. (Figs 4A & 4B). Page 1

4 Approximately 90% of the growth in global crude oil production in the last 10 years came from North American shale. No one can accurately, with confidence, forecast future growth in global production. But we can be certain of one thing: we can be certain of the future of the main driver of the spectacular recent growth, i.e., technology. The application of technologies such as horizontal drilling and hydraulic fracturing is still in its relative infancy, its early years. These technologies (and other associated ones that will be developed) will continue to improve, and, with those improvements, increasingly larger portions of our enormous unconventional resources will become economic reserves with profound impacts on global supply, demand, markets and price (more later). 5. Global Unconventional Activity (Fig#5A & 5B) Every oil and natural gas jurisdiction in the world is evaluating their opportunities for unconventional production Saudi Arabia, Argentina, Australia and various countries in Europe have aggressive programs, all of which pale in comparison to the programs being executed in the US and, to a lesser degree, Canada. 6. US (NA) Unconventional Examples (Fig#2) There are 14 major oil and natural gas shale plays presently active in the U.S. We could discuss the Eagle Ford, Bakken, Marcellus, Barnett, Haynesville, or others in the US, or the Montney or the Dunvegan here in Canada. Each of these developments is well known and familiar. Recent new developments in the Permian Basin of West Texas best describes the vast size of the unconventional resource base and the evolution of the technology that is converting previously known but noneconomic resources into highly profitable reserves. Permian Basin oil production (Fig#6) has almost doubled in the last four years from 1.2 MMBD/D in mid 2012 to almost 2.4 MMBO/D in mid Natural gas production has also risen dramatically in the last several years. Alpine High General Information Since the birth of our modern industry over half a century ago, there have been between 4 & 5 million wells drilled in North America, almost 1.7 million of them in the state of Texas. The Permian Basin of West Texas is composed of two sub basins, the Midland and Delaware Basins separated by the Central Basin Platform. (Fig#7) Apache s new Alpine High light oil and natural gas resource development is located in the southern Delaware Basin. Alpine High has long been recognized as an oil and natural gas sweet spot. Alpine High has 4,000 to 5,000 of stacked pay in five formations. Production ranges from dry gas to wet natural gas to oil from the deepest to shallowest zones. The development covers approximately 1,200 square miles and contains thousands of future locations through the five zones. Total production could someday reach 6 million BOE/day potentially much bigger than our oilsands! Apache and others have called it the biggest new oil and natural gas development in the world in Production is very economic at $45 $50 WTI and $2.50 $3.00/mcf in 2017 dollars. Page 2

5 Several companies, including Burlington, Chesapeake and Petrohawk recognized the potential but didn t have the technology to establish commercial rates and, therefore, left the area as recently as Think about that for a moment. Several highly sophisticated and successful firms turned their backs in 2012 on an opportunity that, only four years later, became the hottest new oil and natural gas growth area on the globe. And it didn t happen on a frontier. It happened deep in the heart of Texas. New technology resulted in improved productivity, i.e., lower costs of all operations, sufficiently to move this vast, uneconomic resource into economic reserves in just four years. Small improvements in productivity can have enormous economic consequences in unconventional resource plays. There are approximately 9,000 oil and natural gas exploration and production companies in the US. They compete with each other very aggressively every day. New technical practices are changing fast and are widely available. Many, if not most, of the companies are fast adaptors particularly the large independents, smaller firms and some of the majors, (i.e., Shell). Productivity, driven by lower prices, has improved dramatically in the last several years and many experts believe it can and will improve another 30 40% in the next several years. Look at the dramatic increases in oil production per rig in recent years in the Permian Basin (Fig#8) faster and cheaper drilling and completion costs are the biggest factor. This is the stuff of the future. Why did Apache succeed at Alpine High? They had an experienced and fully integrated exploitation team (previously with EOG) with Eagle Ford experience and success. They recognized the need for customized rock, fluid, pressure solutions. Full 3D coverage. Access to completion technology improvements made between 2012 and 2015 which were substantial. They are, obviously, fast adaptors. Trust and strong financial support by Apache management. Lessons Learned Alpine High was, at its core, a sophisticated, interdisciplinary technical discovery. The vast, unconventional resource base in the US from which Alpine High evolved will yield other large technical discoveries as the technology continues to improve and evolve, and the industry further develops its expertise in extracting value from unconventional reservoirs. 7. Industry Productivity Improvements High oil prices, i.e., $100 $120/bbl, had the very damaging impacts of reducing productivity and escalating costs in our industry. In every respect, those high prices were the worst thing to have happened to our business in recent decades. We collectively took our eyes off the ball. Conversely, low oil prices, i.e., $30 $40/bbl, were the best thing to have happened to our business. It created a crisis and focused us back to controlling costs and improving productivity. The consequences of our new normal prices of ± $45/$55 WTI have been profound: Shell, for instance, estimates it is now drilling new deep water wells in the Gulf of Mexico around 30% faster and at 50% lower costs than it used to. Shell realizes that you have to have low costs to grow. Shell is also shaking up its corporate culture. It now appoints Chief Irritants to each division. Their only role is to constantly challenge old ways of doing business. EOG is the 8 th largest producer in the Permian Basin 100,000 BOE/D. EOG now drills Permian Basin wells with 8,000+ laterals in 20 days, down from 38 days in The company states that it can get a 30% RoR on wells at $40/bbl and that, at $50/bbl, it can post oil production gains of at least 15%/year in the Basin through EOG said it produced Page 3

6 roughly the same amount of oil in 2016 as it did in 2014 with a budget that was 67% smaller. And they are committed to get even better. Both development and operating costs in our oilsands and conventional production in the Western Canada Sedimentary Basin and, for that matter, throughout the world, have been reduced substantially and we are just getting started. 8. Industry Production and Consumption BP observes that global crude oil demand, presently ±97 MMBO/D, is rising at the rate of 1 MMBO/D/Year and that the rate of growth will decline to 0.5 MMBO/D by Shell, on the other hand, believes that global oil demand will peak in as soon as five years and no longer than 15 years out. IEA forecasts of oil supply, i.e., demand, show that these forecasts have been declining annually since the early 1990s (Fig#9). I believe demand will peak within five to ten years at a level of roughly MMBO/D. This reinforces the reality that the market will soon be both freely traded (OPEC influence declines) and constrained. In this situation, being a low cost producer becomes imperative the competition is rapidly heating up. In October 2016, Rex Tillerson, then Exxon s CEO and now the US Secretary of State, announced that future US oil production from shale will provide the spare capacity needed to meet future demand. Electric vehicles use 75% less energy per mile compared to vehicles powered by internal combustion engines. Rapid advances on EV and battery technology will expand EV sales with commensurate reductions in crude demand over the next five to ten years. I believe that mandated higher fuel efficiency standards driving further improvements in the internal combustion engine will continue to exert downward pressure on crude oil demand. Countries such as Libya and Nigeria, operating outside of OPEC, are presently increasing oil production. Summary Industry & Consumption I believe energy prices will fluctuate around the new normal of $45 $50/bbl WTI and $2.50 $3.00/mcf for natural gas. Fluctuations as much as $10 to $15/bbl above and below that new normal for very brief periods wouldn t surprise me in the least. The days when oil and natural gas were considered scarce resources are long gone. Our industry, due to continuously improved productivity and technology is fully capable of meeting global demand at those new normal prices if necessary from North America alone. As OPEC cuts back production in an effort to sustain market share and price, the U.S. can compensate by increasing production. Thousands of wells have been drilled, tested and shut in, principally to hold acreage. These wells can now be quickly fracced and put on stream as needed. 9. Where Does This Leave Alberta? Observations Recent high energy prices greatly damaged our Alberta productivity and our general economy. All of us, governments, corporations and citizens alike, have been living well beyond our means. Our collective sense of entitlement has reached unsustainable levels. There will be no going back to high energy prices. The ±$80/bbl crude oil price required to balance Alberta s present budget is unrealistic on a sustainable basis. We must compete and innovate in order to attract investment in an increasingly competitive global market. The world doesn t need Canada s oil and natural gas production. The onus is on we Canadians as responsible citizens to keep our resources relevant in global markets. 10. Where Does All This Leave Alberta? Challenge and Opportunity! It is important to understand that the immense technical changes that are, and will continue to Page 4

7 flood into our industry represent both large challenges and equivalently large opportunities for Alberta. Part of opportunity was embodied in an article on p58 of the April 8 th Economist: The global energy industry is fast waking up to the fact that digitization and automation have transformed other industries and has the promise of transforming ours. The CEO of ABB believes that, in exploration activities, the oil industry puts to use barely 5% of the seismic data it has collected. McKinsey suggests that less than 1% of the data from drilling rigs reaches the people making decisions in time to effectively impact their decisions. Last week it was reported that Shell engineers here in Calgary drilled a well in Vaca Muerta, Argentina, utilizing new remote drilling technology. Quote: On their second try, they completed the well for $5.4 MM, down from $15.0 MM a few years ago. It s the cheapest well we have drilled in Argentina (Shell s CEO). A drilling company recently drilled 20,000 feet of hole in two days in the Denver Basin. A new record. The discovery of the bent single and multistaged fraccing technology in the late 1980s and 1990s opened the door to the world s enormous production potential in unconventional shale accumulations. As a result of these discoveries, it is now becoming evident that the exploitation of these reservoirs to date has only been the first wave of the production opportunity. Digital, big data technology now starting to sweep the industry is developing into the second wave of value and this second wave has the potential to be much larger than the first one. Many in industry understand the importance of this new technical transformation. Brian Ferguson of Cenovus gets it he recently stated that they are aggressively exploring new efficiencies by embracing big data and automation. Dave Wickham, Chief Executive of the Canadian Oil Sands Innovation Alliance, gets it. They have developed 936 shared technology projects valued at $1.3B. As mentioned earlier, Shell, Apache and a host of others are adapting quickly to the new opportunities. Nothing moves corporate culture and establishes rapid adaptation more effectively than having the CEO as the chief champion and advocate. I recently attended the day long ARC Energy Investment Forum. It was an enormously stimulating day as speaker after speaker talked about the technical changes and innovation sweeping our business. After Doug Suttles of Encana, a true believer of the transforming impacts of technology on our industry, described the Montney as the world s third largest resource/reserve natural gas accumulation, it occurs that we need another technology hub to join with the good work of COSIA. This second hub would focus on the vast array of new technologies impacting unconventional production outside the orbit of heavy oil and bitumen. GE, McKinsey & industry (i.e., Shell) could all be part of the initiative. We have the available office space and skills as well as affordable housing and a low Canadian dollar working in our favour. Calgary and Alberta are ready for such an initiative. What is needed, clearly is a culture of urgency combined with inspired business and political leadership. 11. What About Us? I m sure some, possibly most, of you are thinking, Okay, if this even partly describes the new energy world, where does the landman function fit? My advice, for what it s worth, would be that since sophisticated, interdisciplinary teams will be the winning combinations going forward, I would be determined to find a place on one of those winning teams. I d find out and be curious about the new technology, both the opportunities and the challenges. I d learn as much as I could about the business of succeeding in unconventional reservoirs. Page 5

8 We Canadians seem to be better than most others at working together, making successful teams work. It seems to be part of our culture. You are at the forefront of that culture and success. The industry needs the skills you have developed. We need now, more than ever, to communicate the technical changes buffeting our industry, the speed with which those changes are occurring, and the need for new infrastructure to connect us with that new, rapidly changing world. In short, I d expand my skills beyond land and establish my place on one of those new teams within industry alongside the geologists, engineers and geophysicists. I believe those teams are the future for all of our professions, working together to improve productivity and create value. 12. Summary & Take aways These are chaotic and challenging times in our industry but we must never forget challenges and crises always produce opportunity. a) Change We are entering a period of dramatic change: Peak crude oil consumption is in sight. Our operating and capital costs are being substantially reduced. Dramatic new technologies are impacting our business. Higher energy prices will not bail us out this time. b) Collaborations We urgently need a new privately led and publicly supported oil and gas technology hub with a design similar to that of COSIA. Calgary is ready. c) Public support d) Urgency We must do a better job of communicating the needs and opportunities of our industry to the public both regionally and federally to ensure we retain a broad level of public support for our industry. We must move forward on a priority basis. Time is short. Inspired leadership is needed. We must accept that, in terms of energy, the past is no longer a guide to our future. I am confident that with our high quality resource base, highly skilled workforce and superior ability to work together as effective teams, we can learn from our present challenges and prepare today for a sustainably successful tomorrow. J.K. Gray April 27, 2017 Page 6

9 Change and Opportunity Delivered to The Canadian Association of Petroleum Landmen Calgary, Alberta April 27, 2017 James K. Gray Chairman, Energy

10 Figure #1 Modified from Gray

11 Figure #2 Source: CIBC Industry Update Aug

12 Figure #3 Aramco s Website Blurb for Unconventional Gas A New Driver of Value Creation Permian - 8,000 (+) laterals - Up to 100 fracs 4

13 Figure #4A Growing tight oil and offshore crude oil production drive U.S. output close to historical high Currently at 9.4 MMBOD 5

14 Figure #4B Currently about 55% of U.S. Gas Production Source: EIA 6

15 Figure #5A Maps of Basins with assessed shale oil and shale gas formations as of May

16 Figure #5B Worldwide Shale Gas Resources (Referring to our Elephant reference, only the head is in the room!) Outside North America, exploration of unconventional reserves is just beginning; however, significant unconventional gas reserves have been identified, some of which are now starting to be targeted for higher levels of development, such as the European and Chinese shales. Potential worldwide shale gas reserves are currently estimated to be 16,103 Tcf. Total unconventional reserves worldwide are estimated at over 32,000 Tcf. Development of these reserves is expected to employ similar techniques to those used to-date in North America. 1 Only 15% of the global estimate of shale gas reserves are in North America; 85% are elsewhere. The development of shale gas in North American has been the laboratory for global development of the immense resource. Global resources of shale gas will be developed at a much slower rate than those in North America. Source: 1. Journal of Petroleum Technology Jun EIA. Figures represent risked recoverable shale gas reserves 8

17 Figure #2 Source: CIBC Industry Update Aug

18 Figure #6 Permian Production 10

19 Figure #7 Permian Basin Apache lands highlighted Source: Apache 11

20 Figure #8 Increased Productivity 12

21 Figure #9 13

22

23 MORE CONFIRMATION. Shale's the Wild Horse OPEC Can't Tame By Julian Lee April 23, :00 AM EDT It was all so simple. By lifting restraints on output, Saudi Arabia would stop subsidizing highcost oil producers and halt the rapid rise in U.S. production that was eating into OPEC's market share. At least, that was the logic back in November But things haven't gone according to plan. OPEC's four-month experiment with production curbs has failed. More worryingly, the strength of shale's rebound suggests that OPEC faces a long-term struggle against this new source of supply in an industry where technological advances are the norm and today's niche play becomes the next decade's global standard. Even when the group restored production curbs last year, Saudi Energy Minister Khalid al- Falih said he didn t expect a big supply response from American shale producers in In fact, it turns out that response had already begun, and it is much stronger than anyone had expected. Production Rebound US oil output could pass its 2015 peak as early as July if recent growth continues Darker line shows what output would be, assuming average growth since November continues. Total U.S. crude production has risen by more than 550,000 barrels a day in the 20 weeks since OPEC decided to cut output, according to weekly Department of Energy data. Much of that increase has come from shale formations. If this rate of growth -- a little under 30,000 barrels a day of new supply each week -- continues, U.S. output could top its recent peak of 9.61 million barrels a day shortly after OPEC meets on May 25 to consider its next move. That is bad enough for OPEC producers, but the picture just gets worse for them each month. The DoE publishes a monthly outlook and its views on domestic production are evolving rapidly -- and not in a way that suits OPEC. Its latest forecast, published on April 11, pegs U.S. oil production at 9.24 million barrels a day by July. That is half a million barrels a day higher than it was forecasting for that month in November 2016, just before OPEC decided to restore output restraint. Its outlook for December 2017 has increased by 700,000 barrels a day over the same period. ACCELERATING GROWTH

24 The Energy Information Administration now sees U.S. production rising by 860,000 barrels a day in the 12 months to December 2017, compared with an increase of 210,000 barrels a day that it forecast in November. What should be even more worrying for OPEC is that the stronger outlook for U.S. production has little to do with higher price expectations. Back in November the EIA assumed an average 2017 WTI price of $49.92 per barrel. That estimate has risen to just $52.28 in this month's forecast. The producer group may be able to drain some of the excess oil inventory by extending its output cuts through the second half of the year. Although spectacular, the rise in U.S. output will not be enough to offset lower OPEC flows as refiners boost runs to meet summer gasoline demand. However, compliance with the cuts may already have been as good it gets. Indeed many OPEC members will find restraint more challenging in the second half of the year. Several have reached their lower targets so far by bringing forward field maintenance, which they won't need to repeat later in the year. Saudi Arabia will also have a tougher time -- its supply cuts came when domestic demand was already at a seasonal low. This demand will pick up as summer temperatures rise, so continued output restraint will have a much bigger impact on the export revenues the kingdom depends upon. Saudi Seasonality Domestic crude use for power generation soars with summer temperatures But the worry for OPEC goes well beyond the current market imbalance. The shale industry is in its infancy. True, the techniques of horizontal drilling and hydraulic fracturing have been used in the oil industry for decades, but their widespread application to shale formations is not much more than five years old. What should really be giving OPEC oil ministers sleepless nights are the parallels between shale and other industry sectors. It would be extremely rash to assume that advances in technology and geographical spread that we have seen in deep-water oil production, for example, will not apply to the shale sector. OPEC's battle with shale has only just begun and initial evidence suggests it may already have been lost. This column does not necessarily reflect the opinion of Bloomberg LP and its owners. To contact the author of this story: Julian Lee in London at jlee1627@bloomberg.net To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net