Unconventionals enter an execution and efficiency phase
The unconventional revolution transformed the U.S. into the top hydrocarbon producer globally, fundamentally changing the global energy and political landscape. The production growth over the past decade contributes >$200 billion of incremental annual revenue to the U.S. economy.
The industry’s constant focus on innovation and best practices has resulted in significant reductions in per-well capex, and improvements in well productivity in every basin. Increased productivity—due to enhanced completions, faster drilling times and longer laterals—allow one rig today to be as productive as six to ten rigs were, less than a decade ago. As these plays gradually mature, we are beginning to see a transition from the productivity phase into the execution and efficiency phase.
Changing fiscal goals. In this new phase of unconventionals, both the return profile expected by the investors and the maturity of the plays has a significant impact on how we develop these reservoirs today versus a decade ago. For over a decade, public upstream companies outspent cash flow meaningfully, as they went through the exploration phase for shales. Their primary focus was on production growth and long-term inventory life, rather than generating free cash flow. At the same time, private operators invested minimal capital to delineate the acreage, to get their assets ready for divesture.
However, the upstream business model has changed rapidly since the downturn. In the current market, E&Ps are mandated to generate free cash flow for the first time in the shale era, as well as strong full-cycle and corporate-level returns. On the other side, private companies are expected to do more than the “prove up with several wells and sell” model. For private companies to find their exit, they also focus on building businesses focusing on growth within cash flow.
The buyer universe wants to be convinced that the future cash flow is associated with a high degree of certainty. Consequently, assets are going to be measured in terms of information and data integrity; repeatable technical best practices; and proven technology applications to minimize future development risk. In short, for the first time, there is a common strategy on how to allocate capital to develop these reservoirs, regardless of being a public or private company.
Technical challenges. On the subsurface side, with 150,000 horizontal wells drilled in unconventional plays, the major basins are becoming mature and introducing new challenges for development. Those challenges are similar across each basin—defining and staying in the target zone; optimizing completion at the right well spacing; and maximizing productivity and economic value per section at a low cost. The technological improvements help the industry to redefine the “core” of each play and continue lowering break-even economics. However, initial data are beginning to show a deceleration in shale productivity gains during 2019. The role of technology and big data is now more important than ever, as optimizing field development is an extremely complex issue, given the interaction of reservoir quality, stacked development, completion techniques, operational procedures, spacing and timing. With operators in development mode, the intrinsic value of every asset hinges on their strategic approach to pad, cube, staggered, and sectional planning/execution and managing parent/child issues. The difference between those that get it right and those that do not will create massive differences in value creation and profitability.
Addressing the abovementioned challenges during the execution and efficiency phase of unconventionals starts with a strategic shift in how we must think about the business. Not only have the business goals changed, but also the development scheme has become more complex, requiring a multi-variable approach to optimize. In this era, data are our treasure, technology is our guide, capital is limited, and profitability is our end-goal for a durable long-term business in any commodity environment.
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