Strawberry Fields Forever?

Posted on August 26, 2010 by Mike Markes

When it comes to developing the Spraberry field in West Texas, Pioneer continues to rewrite the book. In the past we have discussed the Spraberry field and how the addition of the Wolfcamp lead to the “Wolfberry” play. Now it appears the Strawn formation is being added below the Wolfcamp and the results are encouraging…thus the “Strawberry” is born.

Pioneer plans to drill 440 wells in their Spraberry/Wolfberry/Strawberry play in 2010. This is up significantly from their earlier estimate of 125 well. Of the wells remaining to be drilled in 2010, approximately 40% will be drilled down to the Strawn. Pioneer reports wells that have included the Strawn with the Spraberry and Wolfcamp have seen an increase of 20-30% in their IP rates above the average of 60 barrels of oil equivalent per day (BOEPD).

This increase in IP is significant because it allows for the faster recoupment of the investment, which increases the rate of return of the project. I have not seen any numbers reflecting the increased reserves associated with adding the Strawn, so I cannot comment on the affect the Strawn will have on the overall finding costs. Let’s hope the Strawn’s reserves can support the additional costs associated with drilling deeper and adding stages to the frac job.

The Spraberry, and Wolfberry, and no doubt Strawberry plays have always been very sensitive to developments costs. Pioneer has addressed this aspect by not only the sheer volume of development activity, but by also providing their own services. They currently plan on providing 30-60% of their own services internally by 2012. Pioneer is increasing the company-owned frac fleet from one to four, and the number of company-owned drilling rigs from six to twelve.

The results speak for themselves. Pioneer reports an average gross investment of only $1 million for the wells drilled in the first half of 2010 and an associated rate of return of 50% (BFIT). How much of these results include the Strawn is unknown, but if they can consistently increase their IP by 20-30% and continue to hold development costs down, the Strawberry Fields may continue for some time—but forever?
 

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Surplus OPEC Capacity: How Long Will It Last?

Posted on August 18, 2010 by Mike Markes

Rune Likvern has a very interesting article on The Oil Drum: Europe concerning OPEC's surplus capacity, how long it's likely to last, and the potential impact of oil prices. 

For those of us who are in the energy A&D business predicting the future of oil and gas prices is both very important and yet next to impossible to get correct.  The information reported in this article can help support a bullish outlook for oil prices in the near term despite the relatively flat NYMEX strip.

"Based on this analysis, it is probable that demand for OPEC supplies could grow by approximately 2 Mb/d between 2010 and the end of 2011. Putting the estimated current OPEC spare capacity of 2 Mb/d together with the expected increase in demand for OPEC oil supplies of 2 Mb/d suggests that during 2011, OPEC's spare capacity may be completely eroded--a very serious situation."

Read the entire article here

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Is M&A Activity Set for a Rebound?

Posted on August 6, 2010 by Mike Markes

The August 2010 issue of JPT (official publication of the Society of Petroleum Engineers) features a guest editorial by Michael Collier, Partner, Houston Transaction Services Group, PricewaterhouseCoopers in which he makes several interesting observations about the current state of M&A activity and speculates about future activity.

“One sure sign that the economy is in recovery mode is the increase in merger and acquisition (M&A) activity, including the USD 60 billion of deals in the energy sector in the first quarter of 2010. The depth and breadth of the M&A rebound in energy has been fueled by optimism that we are emerging from a global financial “funk” and we are at the beginning of a long period of sustained economic growth.”

Mr. Collier goes on to credit the resurgence in M&A activity to “pent-up demand” and the new “shale-gas paradigm.” He also credits the recovering stock market for leveling the playing field and “allowing senior executives to see stock-for-stock deals as fair.” “Until recently, it was difficult for both buyer and seller to see any particular acquisition price as the right price because earnings of target companies were declining. As the overall economy improves and sellers report steadily improving quarterly earnings, price expectations between buyer and seller are coming into line.”

As for the future, Mr. Collier predicts “When [price expectations between buyer and seller] are finally aligned, which often happens four to five quarters after the economy begins to recover, then we will see not only corporate cash-for-stock deals become common, but we will also see private equity firms come off the sidelines with a major wave of transactions.” However, he also sees some changes in the way deals will be evaluated, “Given the changing economic variables, and some lingering uncertainty in the capital markets, deal-making experience and savvy will be a valuable ‘commodity’. Our corporate clients are starting to recognize these challenges and are making changes to the way they pursue deals. In fact, we have seen them work hard at getting smarter and in some instances, they are adopting some of the skill sets of petroleum engineering firms to better compete and succeed.”

Mr. Collier sees shale-gas as a potential game changer. “Not only does it create the possibility of a dramatic change in the hydrocarbon supply/demand equation, but it has driven and will continue to drive M&A.” Shale-gas has indeed impacted the US energy industry for a number of reasons and Mr. Collier comments on one of the more interesting aspects, “…the rush to exploit shale gas has also triggered a rush to acquire oil reserves. Although this new ‘oil rush’ surprised many industry observers, it now appears quite logical. With gas prices likely to remain flat (given the tremendous gas supplies found in the shales), there is a new expectation that independent oil companies in particular will be rewarded for oil reserves in the portfolios in the intermediate term.”
 

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