US shale doors open

BHP’s spectacular failure and other poor investments by Asia Pacific NOCs and juniors in US shale has burned the ASX from taking the plunge en masse, but there’s plenty of money to be made in that space with proper due diligence, RISC head of geoscience Ian Cockerill said.

Anthony Barich | 18 September 2017 | Energy News Bulletin
Cockerill revealed at Good Oil in Perth last week how the number of wells had thinned out since oil prices plummeted from over US$110/barrel in early 2014 to about $50 today, but emphasised that not all plays are equal from basin to basin.

Independent analyst Peter Strachan is not alone in his strong and widely telegraphed belief that US shale oil is a death spiral waiting to happen, with constant cash needed to keep production pumping amid rapid decline rates. Many see BHP’s failure and pending sale of its US shale business as proof, after news emerged earlier this month that it had hired Barclays and Citi for its divestment. Wood Mackenzie’s Perth-based oil and gas analyst Saul Kavonic even said that BHP Petroleum without its US onshore assets looks “ripe for rationalisation”.

This could impact the diversified miner’s Australian petroleum assets, which include a 50-50 joint venture with ExxonMobil in the Bass Strait, participation in Woodside Petroleum’s North West Shelf JV, operatorship of six oil fields in Pyrenees offshore WA and the Macedon gas field, along with the Minerva gas field in Victoria.

Back to the US, and Cockerill told Energy News on the sidelines of Good Oil that while there are a lot of companies scratching their heads with the positions they’ve found themselves, in, there are still a lot of people making a lot of money in the various basins’ sweet spots.

With the exception of the likes of Aurora Oil & Gas and Eureka Energy, and more recently new entrant American Patriot Oil & Gas who have found themselves in the right spots, others have not been so successful due to lack of due diligence.

“The reason why the ASX has been a bit standoff-ish is because of the perception that all the opportunities have gone, that they’re too late and they’ll just be sitting on the fringes – which I don’t think is true,” Cockerill told Energy News.

They can farm into a position or acquire a position, but the challenge is starting to materially build a greenfield understanding of the basin and take it as a new venture, which is what RISC did assisting Calima Energy in the Montney in Canada.

Yet juniors’ hesitation is understandable given the market is just not conducive to raising money at the moment for energy. Access to capital is so much easier in the US and Europe than it is in Australia.

Old fashioned thinking

Yet Cockerill said that there are real opportunities to do “good old-fashioned geological thinking in North America to understanding basins, “getting to the nuts and bolts of what’s making the system work” – which he believes is not being done enough in the small end of town.

“Companies often go into things without that basic understanding of what the basin looks like, and which position they’re getting into relative to other parts of the basin,” he said.

“It’s hard for companies to do that with low resources, so that’s where RISC and companies like us can help them by building these products to help them get introduced to positions like the Eagle Ford and the Montney.”

Once an understanding is developed from a break-even perspective, a company can then better gauge where to go depending on where they think oil prices are headed in the medium to long-term.

Canadian competitiveness

He said Canada is a much easier proposition than the US due to how the surface land tenure system works, being a Commonwealth system like Australia with a transparent business environment for companies to build their own venture positions from the ground up.

In Canada, he said, companies can also compete with the same data that’s available with the market that’s already there.

Alaska is significantly more expensive than the Montney, which is one of the cheapest regions in North America.

“Canadian plays are extremely competitive on cost,” Cockerill said.

“The challenge there is that it’s all about liquids, there’s so much gas on the market. There are things we can do to map out where those liquids will come from.”

He believes that even considering a consensus oil price range of $45-55, US shale will not fall into a heap, and those who believe it’s a cash-intensive business may not understand the plays’ heterogeneity – the idea that they differ in quality which translates to differences in value.

“In total the play might not be economic, but there will be pockets of sufficient quality to make money, and that’s what I’d done with the Eagle Ford,” Cockerill said.

“Shale oil wells do deplete fast but still pay out after a year. Once it’s depleted you can drill it again two years later and get the same kind of results from unfracced space, so their repeatability is phenomenal. It’s mind-blowing.

“That’s why I personally think we’re going to be in this environment with unconventional oil being the king maker for oil prices over the medium term, the resource is absolutely phenomenal.

“The average Eagle Ford play might only be economic at $60, but there’s a range which says some of it will be economic at $40, some at $80, and it’s understanding how they plays work which is critical.

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