WoodMac: US unconventional enters new stage

Dec. 12, 2014
The unconventional oil and gas revolution is entering into a new stage with drilling and completion techniques pioneered in unconventional plays now being used to exploit all types of rock in mature US basins, according to research and advisory firm Wood Mackenzie.

Gregg Gethard, UOGR Contributor

The unconventional oil and gas revolution is entering into a new stage with drilling and completion techniques pioneered in unconventional plays now being used to exploit all types of rock in mature US basins, according to research and advisory firm Wood Mackenzie.

A report by the firm labels this new phase as Unconventional 3.0-and says it represents a new stage in the hunt for hydrocarbons.

Unconventional 1.0 encompassed the initial phase of the shale boom that began a decade ago with operators targeting highly productive shale gas plays like the Barnett, Haynesville, and Marcellus shales, Wood Mackenzie said. Unconventional 2.0 involved producers turning their attention to tight oil plays in order to increase profit margins and capitalize on the premium crude commands relative to natural gas in the US.

This third phase applies the lessons learned and techniques developed during the first two phases of the revolution to a wider range of formation types.

According to the report, "In the current phase, the two techniques that define unconventional projects-horizontal drilling and multistage hydraulic fracturing-are being used to exploit all types of unexplored rock volumes in mature basins." Wood Mackenzie said this is "presenting a wider unconventional opportunity set than early shale explorers ever anticipated."

Wood Mackenzie says 35 horizontal rigs-which it describes as "one of the best" proxies for trends in unconventional drilling-went to work in non-headline plays in the first 8 months of 2014 compared to the previous year. The increase outpaced combined rig growth in the Utica and Niobrara shales.

"Lots of small companies are leading exploration efforts, somewhat unexpected sweet spots are being identified, and there appears to be a sense of urgency to close deals once successful wells are drilled," the report said.

The Eagle Ford shale, widely considered noncommercial in 2006, produced more than 1 million b/d of liquids and 4bcfd of natural gas as of mid 2014. ConocoPhillips photo from UOGR September/October 2013, p. 20.

Big deals

The lure of using unconventional techniques on non-shale and non-tight oil plays has likely played a role in several large transactions this year.

Encana Corp. in March sold 24,000 acres of natural gas properties and over1,500 active wells in the mature Jonah field in Wyoming to an affiliate of TPG Capital for $1.8 billion. The deal included more than 100,000 undeveloped acres adjacent to the field, known as the Normally Pressured Lance area, that hold the potential for more gas discoveries.

In another deal, Energy & Exploration Partners Inc. purchased 18,300 net acres targeting the Buda-Rose formation in East Texas from TreadStone Energy Partners for $715 million. Energy & Exploration Partners said in a release that it plans to "aggressively exploit the stacked pay zones of the acquired assets." Earlier this year, the company completed a vertical well targeting the Buda-Rose on acreage adjacent to the acquisition area and said it was "encouraged by the volume of oil and gas" flowing up tubing. The acquired assets hold 32.8 million boe of proved reserves, and the purchase increases Energy & Exploration Partners East Texas acreage position to 72,000 net acres.

The multimillion dollar transactions are not exclusive to Texas and Wyoming. In September, Bill Barrett Corp. sold more than 46,000 net acres in the Powder River and Piceance basins to undisclosed purchasers as part of a deal valued at $757 million.

EOG Resources Inc., which was not involved in the deal, has demonstrated that producers can use unconventional techniques to target new zones in the Powder River basin. During a presentation of second-quarter results, Billy Helms, executive vice-president of exploration and production for EOG, said the company recently completed two wells targeting the Parkman formation. The wells flowed at initial production rates of 1,045 b/d and 980 b/d. EOG is targeting light, sweet crude in both the Parkman and Turner formations in Campbell and Converse counties, Wyo. The company plans to drill 34 net, horizontal wells into the Powder River formations this year.

SM Energy Co. is also active in the basin, and is this year delineating the potential of the Frontier and Shannon intervals across its acreage. The company is so confident in the Powder River basin’s potential that added 33,000 net acres to its area leasehold this year, bringing its total position to 166,000 net acres. During a presentation of second-quarter earnings on July 30, Anthony Best, chief executive officer of SM, said work was under way at one exploratory well targeting the Shannon that was expected to cost $11.3 million. He added that well costs are expected to come down over time.

Wood Mackenzie said the key to success in the Powder River basin is keeping drilling and completion costs below $8 million/well. That, the firm said, could lead to returns of 20% or more.

Ahead of the curve

Many large exploration and production companies active in large shale plays like the Marcellus constantly tout their results, leading to a seemingly never-ending search for bigger headlines and proclamations said Glenn Hart, chief executive officer of Laredo Energy.

Hart told UOGR that opportunities exist elsewhere beyond what Wall Street analysis suggest. "The whole trick in this game is figuring out what is happening before it is happening," he said.

"That’s what separates the men from the boys in this industry."

Laredo is at the forefront of embracing the old-is-new philosophy that characterizes the Unconventional 3.0 era.

The company is revisiting overlooked formations in Webb County, Tex., which sits in the dry gas window of the Eagle Ford shale. In addition to the 27 Eagle Ford wells drilled here, the company has drilled another 86 successful horizontal wells targeting other stacked pay zones. These include 43 wells targeting the Escondido formation, 13 wells targeting the Olmos, two wells targeting the Austin Chalk, and one well targeting the San Miguel.

The wells the company drilled into the Eagle Ford shale yielded data that led to other opportunities. The drilling logs, core samples, and 3D seismic data, generated by work on these wells helped the company identify other prospective formations with shale-like characteristics, such as low permeability.

"We think it’s worthwhile to invest in gathering more data in the front end. But, we’ve seen people time and time again proven wrong by not gathering proper information," Hart said, noting the importance of collecting the right information. "Out of all the positions and departments we have at Laredo, our geologists are our superstars."

Laredo is also expanding its operations to include a drilling program that targets the emerging Eaglebine horizontal oil play in the Permian basin in Brazos, Burleson, and Robertson counties, Tex. The Eaglebine encompasses a number of stacked pay zones, including the Eagle Ford shale, Georgetown, Buda, Austin Chalk limestones, along with multiple Woodbine sand horizons.

The company is utilizing pad drilling to reduce its costs, making these plays even more economic, Hart said.

Private equity firms are showing interest in Laredo’s pivot toward stacked pay zones in Texas. In May, the company received $130 million in private equity commitments from Avista Capital Partners and Old Ironsides Energy, LLC.

Hart said he does not know what the future holds for Laredo. The company could eventually hold an initial public offering or sell off its assets.

"Up to this point, any shale play has been used as the sexy term," Hart said. "Our horizontal Escondido play is probably better than most of the shale plays out there. If we were to change the formation’s name to the Escondido shale, we could find somebody who would probably pay us twice the amount for it."

Hart could one day see investors get excited about plays like the Escondido.

Wood Mackenzie said a significant shift in the attitude of what characterizes an unconventional play is well under way. "Investors and operators need to be abreast of the specifics around what is unfolding in the Lower 48."