Many look to the Eagle Ford Shale as a phenomenal example of US oil and gas companies doing exceptional things. But not everyone shares our enthusiasm.
Vladimir Putin recently said, “It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation.”
Apparently, he thinks the world would be better off if we all saw ourselves as hopeless lackeys.
However, there is a certain amount of delicious irony in this statement, because the reality is that the whole story of the US unconventional oil and gas industry is about American Exceptionalism.
It’s about those operators in our industry that aren’t afraid to push the envelope. The operators that understand the risks AND rewards, and challenge the status quo with regards to what is and is not possible.
Not all Operators are Created Equal
We recently examined several thousand wells and extracted a variety of geological and petrophysical parameters to build a geological model across the Eagle Ford play to replicate the methods we employed in the Barnett and the Bakken. We then analyzed the over 7,000 wells that are producing today to reference against these to find out what things that are actually driving results in these shale plays.
What we found in EACH PLAY is there really is no such thing as established “best practices” in unconventional oil and gas. There is only what we know today, and everything gets to be challenged.
There are a handful of operators that are starting to challenge what the others are doing and thinking. These operators demonstrate that in unconventional oil and gas, these shale reservoirs are not the same beasts for everyone. There are companies that do it more right, and there are companies that are doing it more wrong.
Not surprisingly, the companies doing it right are booking large reserves and seeing exceptional returns – both in terms of new production and new investments into the company. So a great divide exists between those operators that are willing to invest in the knowledge, analytics and technology you need to be successful in plays like the Eagle Ford Shale, and those operators that are crossing their fingers hoping for the best.
If you are in the latter group, I present to you 5 reasons that show beyond a shadow of a doubt to thrive in the 21st Century oil and gas industry, you absolutely must become an exceptional shale oil operator.
Lessons from the Eagle Ford Shale: 5 Reasons You Must Become an Exceptional Unconventional Operator
1. Accelerated Production: The very best Eagle Ford Shale operators produce 30% to 40% better than the median FOR THE SAME QUALITY OF ROCK, and they produce 3 times as much as operators at the low end. Companies like EOG, Marathon and Freeport can work the same rock, with basically the same equipment and get 3x the production. What would it do to your stock price or the amount of investors willing to partner with you on your next operation if you could go out there and say you produce as much as 3 times as the rest of the industry drilling the exact same rock?
2. Access to Prime Acreage: The implications for mineral owners in this scenario are obvious. Massive gaps in production naturally lead to large gaps in royalty payments. A 25% royalty lease with an average operator is the equivalent to an 18% royalty lease with the best operators. That same lease with the worst operators is the same as an 8% lease with the best. As a mineral owner, when was the last time you gave an 8% lease? If it was recently, call me. Lets do some bidness! As an operator, are you taking advantage of your abilities to get the better leases?
3. Opportunity Cost: Based on current numbers, we anticipate the Eagle Ford Shale will reach a maximum rate of production in as early as 2022. Production will flatten out until about 2028-2029 and then start to drop. Looking at the baseline production forecast in grade A to G acreage, there are up to 85,000 wells left to be drilled. If you take it down to H-grade acreage – which the best operators will eventually be able to go out and produce – you’re looking at as many as 100,000 wells left to drill in the Eagle Ford Shale. How much money are you leaving on the table if you don’t go out and get your biggest share of that 100,000?
4. Lower Break Even Cost: As I alluded to in the last point, our DI Analytics team has graded the produceability of the Eagle Ford Shale and graded the acreage from A through J grades. What’s fascinating is at G-grade, the average operator needs oil prices at $101 to break even. However, the best operators can break even when prices are as low as $60 in this same grade of acreage! You see this same ratio all the way up into the best acreage. Naturally, this means if you’re not a very good operator, you have to have really fantastic acreage to turn a profit. But if you’re an incredible operator, there’s a whole lot of opportunity for you to pick up acreage belonging to worse operators for what is essentially the proven producing value. Which side of the equation would you rather be on?
5. Service Companies Can’t Save You: There is a rule of thumb in the oil and gas industry that says oilfield service companies provide a wonderful method of technology transfer. In other words, you don’t really need to know how to do the work because you can get company A, B or C to go tell you how it’s done. After all, they do everybody else’s wells so they can just tell you the secret sauce, right? But the data shows that’s simply not true. As essential as they are to the industry, oilfield service companies are not involved in enough pieces of the puzzle to effectively take or even recognize best practices and successfully apply them across the board. How much money to you stand to lose by counting on service companies to save your GG&E team?
To the Victor Go the Spoils
What this all boils down to is it’s those companies that are willing to roll up their sleeves, do the work and make the investments necessary to master these plays that are seeing extraordinary returns. And these same companies stand to continue making gains well into the future.
Operators like EOG, Marathon and Freeport may seem like the minority today because they are part of the small handful of people that “get it”. But it won’t take long before they begin to sweep up and produce the massive amounts of acreage that will be left behind by those that have not made the necessary effort to be good at unconventional drilling.
After the dust settles in the South Texas oilpatch, we will see it was the true unconventional innovators that were the majority all along … because these will be the operators that are left standing. These survivors will be the ones left happily maximizing production and returns from acreage so many others gave up on long ago.
Thomas Jefferson once said, “One man with courage is a majority.”
Again, which side of the equation do you want to be on?
What do you think? How much of a time horizon do we have left in the Eagle Ford Shale? And which operators will ultimately win out? Leave your thoughts in the comment below.
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