KEY	
  CRITERIA	
  FOR	
  A	
  SUCCESSFUL	
  	
  
SHALE	
  OIL	
  BUSINESS	
  
Shale	
  Oil	
  is	
  different	
  to	
  Conven?onal	
  Oil,	
  but	
  not	
  like	
  Mining	
  either	
  …	
  
• 
• 
• 
• ...
Shale	
  Oil	
  …	
  global	
  factors	
  
• 
• 
• 
• 
• 
• 

Young	
  business	
  with	
  explosive	
  growth	
  in	
  US...
Shale	
  Oil	
  …	
  project	
  features	
  
• 
• 
• 
• 

Shale	
  oil	
  development	
  focus	
  moving	
  from	
  “efficie...
Shale	
  Oil	
  …	
  project	
  economics	
  
• 
• 
• 
• 
• 

Very	
  high	
  incremental	
  well	
  IRRs	
  and	
  per	
 ...
Shale	
  Oil	
  …	
  financial	
  maMers	
  
• 
• 
• 
• 
• 
• 
• 

Early	
  reserves	
  booking	
  crucial	
  to	
  raise	
...
Shale	
  Oil	
  …	
  corporate	
  maMers	
  
In	
  the	
  long	
  run,	
  I	
  see	
  two	
  dominant	
  types	
  of	
  sh...
Hence,	
  what	
  are	
  the	
  key	
  success	
  criteria	
  for	
  shale	
  oil	
  ?	
  
• 
• 
• 
• 
• 
• 

• 
• 
• 
• 
...
Any	
  risks	
  with	
  shale	
  oil	
  ?	
  
• 
• 
• 
• 
• 
• 

Oil	
  prices?	
  ….	
  No,	
  would	
  not	
  worry	
  a...
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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. 1. KEY  CRITERIA  FOR  A  SUCCESSFUL     SHALE  OIL  BUSINESS  
  2. 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. 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. 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. 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. 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. 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. 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. 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  

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