UPSTREAM NEWS
US production capacity increase
New US production capacity increased by 12%, to 424 MBOE/day, according to the August Drillinginfo Index. Last month's Index was 366 MBOE/day. Percentages are normalized for length of months. The August Drillinginfo Index is reflective of the wells drilled in July and is usually a 5-6 month forward indicator of what production might be. Additionally, the Drillinginfo Rig Count increased to 551, which tracks 95% of US onshore rigs via GPS units.
Neuquén basin Tight gas production ramps up, representing a quarter of the basin's output
Operators in Argentina are focusing on reversing the Neuquén basin's gas production decline by targeting low-permeability, tight gas reservoirs. The shift to tight gas production over the last three years is being driven by pricing incentives and lower costs versus shale gas wells. However, at current costs only the best tight gas wells break-even at the incentivized US$7.50/MMbtu gas price according to the latest Wood Mackenzie analysis.
In the past two years, tight gas production has almost tripled in the Neuquén basin. By Q1 2016, production reached 565 MMcfd, or 16 million cubic meters per day (MM3/d), representing a quarter of the basin's output.
"Tight gas continues to provide big opportunities for operators in Argentina," said Horacio Cuenca, Director of Latin America Upstream Research for Wood Mackenzie. "However, our recent analysis shows that there is a lot of variability in well performance and economics across all tight gas formations."
Well performance has been extremely variable across all formations. Of the six tight gas formations studied, the median well in the Neuquén basin has a 90-day initial production rate (IP90) rate of 56 thousand cubic meters per day (km3/d), or 2 MMcfd, with top quartile wells performing about five times higher than the bottom quartile. Horizontal wells targeting the Mulichinco formation promise the highest Estimated Ultimate Recovery (EURs), at more than 5 bcf. The best wells in Punta Rosada are expected to achieve similar results with a vertical construction. Representative wells in the Lajas formation, however, are expected to recover a third of that volume.
"The large variability indicates that tight gas in Neuquén will continue to require a statistical development approach. This means that large, multi-well development programs will be used to spread the productivity risk among a large number of wells; this approach is more similar to shale than to conventional developments," added Cuenca.
Higher costs aren't necessarily bad, as long they improve production
Longer laterals, more fracture stages and increased water and proppant usage are all factors that have been shown to enhance production but also markedly increase well cost. Different sections of the same play also require unique considerations given variance in rock quality and thickness, pressure and temperature.
"What is critically important is the relationship between the cost of these wells and the productivity they can achieve," said Cuenca. "Our analysis shows that the tight gas wells with the highest costs also have the highest EURs and IP rates."
Using type-well EURs and Wood Mackenzie's current well cost estimates, Mulichinco horizontal wells and Punta Rosada vertical wells (the most expensive in the basin, on average) are profitable at or below the government's US$7.50/MMbtu incentivized gas price. These costs reflect a 15% reduction versus 2015 levels, driven by the strong peso devaluation at the beginning of 2016. However, considerable additional reductions are still needed for type wells in these and other formations to be economic at the US$5.20/MMbtu average gas price without incentives.
"Beyond discovering and focusing on the best producing sweet spots in each formation, enhancing EURs through more expensive wells (i.e. horizontal sections or targeting deep, thick formations with a high number of frac stages) seems a more plausible path for improving tight gas well economics in the short term, rather than the drastic costs reductions needed with current EURs," said Cuenca.
Capital efficiencies of Argentina's tight gas wells are on par with the best plays in the US
Capital efficiencies on IP rates in the Neuquén basin ranged between US$9,340 per boe/d and US$20,000 per boe/d. EUR capital efficiencies ranged between US$13.7 per boe and US$29 per boe.
Wood Mackenzie recently estimated capital efficiencies for unconventional wells within the Karnes Trough and Edwards Condensate sub-plays of the Eagle Ford in southern Texas. The study leveraged our North American Well Analysis Tool (NAWAT) for well costs and productivity, and focused on wells completed by the largest US operators during 2014 and 2015. Capital efficiencies on IP rates ranged between US$8,000 per boe/d and US$15,000 per boe/d. EUR capital efficiencies ranged between US$16 per boe and US$31 per boe.
Quantum Materials developing nanomaterials for tracing fracking fluids to point of origin
North American quantum dot manufacturer Quantum Materials Corp. has partnered with a Texas-based E&P technology business and is currently developing specialized nanomaterials for use in oil and gas well production optimization. The project, which is nearing the completion of the initial phase, is targeting new materials which are expected to provide for safer and more efficient recovery of hydrocarbon resources.
"We are excited to be a part of this project which has the potential to bring a wealth of new information to the oil and gas industry," said Sri Peruvemba, CEO of Quantum Materials Corp. "However more importantly to Quantum, the challenges of creating nanoparticles that can withstand the harsh downhole environment are leading us to discoveries that we can apply to make our quantum dots for use in displays and lighting more robust."
The company realized a small revenue contribution from this project in fiscal year 2016 that ended June 30.
Twenty-two percent increase in number of vessels in Persian Gulf area
The team of offshore analysts at Vessels Value has put together a report looking at offshore activity in the Middle East over the last year. The following is an excerpt of the findings:
During this current downturn we have seen optimism centered on the Middle East as a potential growth area for OSV work. There have been easing of sanctions against Iran, new Middle-Eastern and Indian players looking at distressed older tonnage as a way into the market - Hind Offshore (Lady Grace), Ocean Sparkle (OSL Triumph), Halani Shipping (Halani 6), Tag Offshore (Tag 20) and nations such as Saudi Arabia maintaining production levels in fear of losing oil market share.
Using VesselsValue AIS data VV@ we can see that between January 2014 and July 2016 there has been a 22% increase in the number of vessels in the Persian Gulf area. Unfortunately, this has resulted in a significant oversupply with many vessels now laid up in the area.
The excess supply has come mainly from the South China Sea and has resulted in intense competition for contracts. From observing VV data, Middle Eastern competition is set to increase with c.70 vessels set for delivery in this area over the next two years.
Analysis of the VV AIS data shows a total 7% decrease in the number of vessels in the five regions between June 2014 and July 2016. With the exception of the Persian Gulf, which has seen a notable increase in vessels since March 2015, all four other regions have seen a decline during the same period. There have been fluctuations to these numbers in each region: the South China Sea suffered this reduction in vessel numbers slightly later than the other regions (May 2015), while there has been a slight increase in the North Sea since March 2016.
Bolivia: Total starts production at Incahuasi gas field
Total has put on stream the Incahuasi gas and condensate field, the Group's first operated development in Bolivia, with a production capacity of 50,000 barrels of oil equivalent per day (boe/d).
"Incahuasi is one of the largest gas and condensate fields brought on stream in Bolivia. Incahuasi's production will contribute to Bolivia's gas exports to Argentina and Brazil as well as domestic consumption", said Arnaud Breuillac, President of Total Exploration & Production. "Delivered within budget, Incahuasi is the 4th start-up this year and as a low-cost project with a long production plateau, it will contribute to the Group's production growth in 2016 and beyond."
The Incahuasi field lies at more than 5,600 meters beneath the Andean foothills, 250 kilometers from the city of Santa Cruz de la Sierra. The first phase of the field development involves three wells, a gas treatment plant and 100 kilometers of associated export pipelines. The second phase of development, involving three further wells, is currently under consideration.
Incahuasi is situated in the Aquio and Ipati blocks. The development is operated by Total (50%), with partners Gazprom (20%), Tecpetrol (20%) and YPFB Chaco (10%).
Total has been present in Bolivia since 1996 and is one of the country's leading oil and gas companies, with 2015 equity production of 28,000 boe/d, mostly gas. In addition to the operated Incahuasi field, Total is a partner on the San Antonio, San Alberto and XX-Tarija Oeste (Itaú) production licenses. The Group also operates the 7,800 square kilometer Azero exploration license in the Andean foothills.
Marathon Oil Announces First Gas from Alba B3 Compression Platform
Marathon Oil Corp. achieved first gas production through its new Alba B3 offshore compression platform off Equatorial Guinea. Production from the B3 platform allows Marathon Oil to convert approximately 130 million barrels of oil equivalent of proved undeveloped reserves, more than doubling the company's remaining proved developed reserve base in EG.
"The Alba B3 compression project will allow us to maintain plateau production for the next two years, mitigating base decline, while extending the Alba Field's life by up to eight years," said Mitch Little, Vice President-Conventional.
Execution of the Alba B3 compression project involved engineering and construction in four countries with Heerema Fabrication Group (HFG) serving as the general contractor. An Equatoguinean construction firm fabricated both the platform flare and bridge structures as part of Marathon Oil's commitment to building local capacity within the country.
Marathon Oil's wholly owned subsidiary Marathon E.G. Production Limited holds an approximately 65% working interest in the Alba Field and is the operator, while Noble Energy Inc. owns approximately 35%.
Bill Barrett resumes DJ Basin development program
Bill Barrett Corp. plans to resume its extended reach lateral (XRL) development program in the Denver-Julesburg (DJ) Basin during the third quarter of 2016. The move comes after the Denver, CO-based company idled its only rig in the Niobrara in the first quarter of the year.
The company expects up to 12 gross XRL wells will spud prior to the end of year and will be placed on initial production in the first quarter of 2017. The company projects that its 2016 capital expenditures will now be at the high end of its previously disclosed guidance range of $75-$100 million to account for the additional drilling activity.
"We believe that lower demonstrated well costs and operating expenses, combined with a narrowing DJ Basin oil price differential, will generate a competitive rate-of-return in the current commodity price environment. While the increased activity will not impact our 2016 production, it builds increasing operational momentum as we move in to 2017. We remain positioned to be cash flow positive this year even at the upper end of our capital expenditure guidance range, allowing us to preserve the strength of our liquidity position," said Bill Barrett CEO and president Scot Woodall.
Noting company management had foreshadowed incremental activity in the second half of the year during its Q2 call, analysts at Seaport Global Securities said the news is not surprising.
In a note following the announcement, the analysts detailed the improved well costs on XRLs ($4.25 million vs. $4.75 million previously), and lower DJ differentials ($3-$5/bbl, down from $5-$7/bbl). The focus now, said the analysts, will be on "what the restart does to 2017 numbers - both growth and level of outspend are important."
Israel promotes First Offshore Energy Exploration Licensing Round
The Israeli Ministry of Infrastructures, Energy and Water Resources (MIEWR), the government agency responsible for overseeing all petroleum-related activities in Israel, plans to host a road show in September 2016 for promotion of the country's first offshore energy licensing round, said IHS Energy, part of IHS Markit. The company is serving as an advisor for the round, and will facilitate the accompanying road shows on behalf of the ministry.
In this licensing round, the MIEWR will offer 24 blocks for bid in Israel's offshore waters of the Levant Basin, located in the Eastern Mediterranean Sea. The blocks, some of which are adjacent to recent major gas discoveries, are a maximum size of 400 km2, and sit in water depths of between 1,500 meters and 1,800 meters.
Yuval Steinitz PhD, the Israeli Minister of Energy, and other representatives from the ministry, will present details for the Israel offshore licensing round at road shows in London, Sept. 1, 2016, and in Singapore, Sept. 6, 2016.
Later this year, the ministry will schedule an additional information session in Houston. The round will officially start in November 2016, while closing date for bids on the offered blocks will be March 2017, IHS Markit said.
At each road show event, the MIEWR staff will present the bid-round schedules and guidelines, the legal and fiscal terms, as well as a technical overview of the hydrocarbon potential of the nominated blocks and a discussion regarding the availability of data. The event will also include a presentation on the gas-monetization options in the Eastern Mediterranean.
A recent, third-party basin modeling study concluded that as much as an estimated 6.6 billion barrels of oil and 2.13 trillion cubic meters of gas are yet to be found in the offshore part of the basin (in-place, yet-to-find, best estimate). A data package, which includes speculative seismic data and historical well data, is available to interested parties.
Integrated Oil, E&P Sector Outlooks Changed to Stable
Buoyed by an expected recovery in oil and natural gas prices, alongside greater business efficiencies and cost-reduction efforts, Moody's changed its industry outlooks for both the global integrated oil and exploration and production (E&P) sectors to stable from negative. This marks the first change in outlook to stable for both sectors in nearly two years.
Investors spent $245B in upstream energy in Last Decade
Commodity trading firms, diversified conglomerates, financial service firms, government entities, hedge funds, investment firms, pension plans and private equity firms spent $245 billion on upstream energy transactions during the past decade, said IHS Markit.
These investors have "significantly expanded their investments in the upstream E&P sector," said IHS Markit senior financial analyst Cindy Giglio. "We expect this trend to continue, since they can afford to go bargain hunting for deals that have significant upside potential when oil prices improve, and they also see the sector as a very attractive outlet for longer-term investments. They can better afford to sit on those investments and wait for greater returns."