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Vinod Dar
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I am the managing director of Dar&Company in Bethesda, MD. We provide business advice and corporate governance coaching to presidents, CEOs, and chairmen of energy and utility companies. Our clients have ranged from the largest utility holding, energy finance and energy technology companies... More
  • Will the Utica Shale Surpass the Barnett and Marcellus?

    The Barnett and Marcellus shale plays are justifiably regarded as world class resources for natural gas and are becoming recognized for their great gas liquids potential. Thus, when industry conversation starts mentioning a  North American gassy shale play that could be in the same league or eventually  even more impressive than these two proven plays, both industry participants and investors become curious.

     

     

    The Utica lies beneath a very large geography

     

    In physical extent the Utica shale covers a geography about twice as extensive as the Marcellus (and far more extensive than the Barnett). In terms of hydrocarbon resources no one knows the potential of the play. It is too early in its E&P lifecycle (recall that the first modern well was drilled in the Marcellus by Range Resources only in 2004). Only a few commercial wells have drilled by less than half a dozen companies but even so expectations have risen dramatically.

     

    The Utica lies between 3,000 and 7,000 thousand feet beneath the Marcellus but extends further northwest and much further southwest. It underlies parts of New York, Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Tennessee, Kentucky, Lake Erie, Lake Ontario, Ontario and Quebec. Its depth ranges from about 2 miles deep in parts of Pennsylvania to under 2,000 feet below sea level in parts of Ohio, the Great Lakes and Ontario. It is reportedly even shallower in Quebec.

     

    It is this very large footprint that is persuading E&P companies, especially Canadian companies, to postulate that the Utica shale may be a very large resource play even if recovery with current technology is only in the 2 to 3 % range. Each generation of technology increases recovery rates and the industry is confident that recovery rates will keep rising over the next few decades.

     

    The Utica has a much higher carbonate and lower mineral clay content than the Marcellus. Thus the production techniques that suit the Marcellus may not suit the Utica; however, the experience gained from the high carbonate Eagle Ford may be directly relevant. The Utica is of considerably varying thickness, from over 500 feet in the East to less than 100 feet in the West. Depth does equate to resource potential. The liquids window of the Utica is thought to be in the West and it is this liquids window that is likely to attract industry attention and risk capital much more than the dry gas in the East.

     

     Where the Utica lies beneath the Marcellus, the disadvantage of greater drilling depth is partly or wholly mitigated by the opportunity to benefit from existing drilling pads, roads, permits, filings, landowner agreements, gathering and processing systems , pipelines and the  local presence operating experience of field service companies and drilling crews.

     

    Early Activity

     

    Much of the leasing activity in 2011 for the Utica has been, as might be expected, in Ontario and Quebec where the resource is quite accessible. However, the first commercial drilling is said to be in Pennsylvania (Butler County).  Range Resources drilled what it believes to be the pioneering commercial well in 2010 and plans more drilling in 2011. Consol Energy drilled a discovery well in the Utica and will shift exploration resources to this play in 2011. Shell and Chevron (via the acquisitions of East Energy and Atlas Energy respectively) are well positioned to be significant in the Utica.  Chesapeake Energy supposedly is building a land position in this play, most likely in Ohio. Private equity and MLP investors have also been briefed on the nascent Utica play and the response is said to be encouraging.

     

    In Canada a Utica pioneer is Gastem, based in Quebec. It drilled two exploratory well in Quebec explicitly to test the Utica in 2006 and is convinced the play is real. Another Canadian company, Epsilon Energy, has formed a joint venture with Gastem to pursue the Utica in the St. Lawrence Lowlands. Forest Oil (Canada) has drilled two successful Utica test wells in the Gaspe Peninsula. A recent discovery by Questerre Energy in the St Lawrence Lowlands is considered to be strategically significant by companies active in that area. Questerre has been studying the Utica shale in Quebec for about two decades.

     

     

    It is worth recalling that the Marcellus excitement began just a few years ago with a small pioneering company. The resource potential was initially viewed as quite limited and neither the majors nor government agencies thought there was much commercial significance.  Today the Marcellus is estimated to have a technically recoverable resource of over 250 trillion cubic feet (about a mid teens ultimate recovery rate).  In a mere 6 years the play went from novelty to world class. It is this trajectory and record of success that inspires the half dozen or so companies that are now seriously investigating the Utica. If there is validation then one would expect the number of companies committing money, technology and management time to the Utica to jump to over two dozen by end 2011.

     

     

     

     

     

     

     

     

     

    Feb 28 4:17 PM | Link | 2 Comments
  • The Shale Gas Exploration Business Becomes Global As Drilling Starts In Argentina

    The shale gas industry started, of course, in Texas and spread across North America and from there to Australia. In the past 12 months shale gas exploration has accelerated in Asia (China with India following) and Europe (Poland has the lead but efforts are underway in several countries). In Africa, South Africa has the lead and now serious exploration has begun in Argentina. No energy discovery industry has globalized as rapidly as shale gas: indeed no substantial industry of any kind may have become global so swiftly. Where the Texas independent led, the world now wants to go.

     

    The Argentine company YPF( now owned by the large Spanish company, Respol) announced a 4,500 billion cubic feet(Bcf)  shale gas  discovery in Loma de La Lata  conventional gas field  in the well known and productive Neuquen Basin in Patagonia. The Vaca Muerta and Los Molles shales are the principal source rocks in this basin. YPF guesses that the shale gas resource base in the Neuquen is over 250 trillion cubic feet (Tcf). Argentina’s annual gas consumption is 1.5 tcf and its proven, documented, reserves are about 15tcf so the discovery is far more significant for Argentina than the Barnett was for the US.

     

    YPF has entered into a $140 million joint venture with the Brazilian iron ore and mining multinational, Vale, which will use the gas to develop a $4.3 billion dollar potassium project in nearby Mendoza. Shale gas exploration has only now become attractive in Argentina with the revision of that country’s gas pricing structure. The Neuquen Basin already has a gas transportation and field services infrastructure in place.

     

    A small Canadian independent, American Petrogas Inc (NYSEMKT:API) is also enthusiastic about shale gas development in the Neuquen. The company has 16 exploration blocks, both for conventional and shale gas, in the eastern and western parts of the basin and thinks its western blocks have the greatest potential for shale gas. API believes that there is shale gas in 9 of its blocks and the resource potential of these blocks is 100 tcf. A strategic investor in API  is the large fertilizer company called Indian Farmers Fertilizer Cooperative (IFFCO), which  has a strategic alliance with API to explore for natural gas. IFFCO suggests that Indian companies should become involved in Argentina’s shale exploration.  API has invited two government owned Indian companies to invest in its shale prospects. These companies are Oil India and GAIL.

     

    Apache Corporation is encouraged by the new pricing policy in Argentina which provides incentives to develop new supply. Apache expects to have 900,000 net acres in the shale gas prone part of the Neuquen. The company has a partnership with YPF to develop shale gas in several prospective blocks. It is currently drilling the first horizontal multi fracture well in Latin America specifically to develop shale gas.

     

    Total SA, the third largest integrated oil company domiciled in Europe, has acquired an interest in 4 shale gas blocks in the Neuquen and will explore in partnership with YPF. This follows the acquisition of an 85% interest in 2 other Neuquen shale gas blocks recently.  Total operates about a quarter of Argentina’s natural gas production. It aspires to a significant portfolio of shale gas and oil assets worldwide, to which it can profitably apply what it has learned from its 25% interest in Chesapeake Energy Corporation’s holdings in  the Barnett shale (where the shale gas industry originated not very long ago). Total is already present in the Bakken like formation in the Paris Basin in Northern France and plans to develop shale assets in Denmark, Canada, Australia, Algeria and China.

     

    ExxonMobil may also become an important participant in Argentina’s shale gas industry. In addition to its very large business position in “unconventional” oil and gas resources in North America, the company is also investing or plans to invest in such plays in Colombia, Germany, Poland, China and Indonesia.  Poland is the leader in shale gas development in Europe and China in Asia and Argentina now in Latin America.

     

    Lessons From Around The World

     

    There is accumulating evidence from onshore basins around the world that:

     

    1. The term “mature” basin or province does not define a state of nature but a human state. The term “mature” is a description of the entrepreneurial imagination, technological capability, geologic knowledge and the matrix of laws and regulations that are imposed on oil and gas resources. Human choices, decisions and understanding are the constraint on oil and gas development, not the physical endowment. From the Permian Basin to the Paris Basin, from Pennsylvania to Poland it is now becoming clear that was “mature” according to yesterday’s received wisdom is once again a frontier or emerging play today and will be a core asset tomorrow.

     

    1. The shale gas and tight gas resources in “mature” provinces far exceed the “conventional” resource base, usually by multiples. Low permeability gas is far more abundant than medium permeability gas which, in turn, is more plentiful than high permeability gas.  It is high permeability onshore gas that is “mature”. What is rapidly emerging and will soon eclipse the contribution of high permeability onshore gas are shale and tight sands gas and offshore, especially deep and ultra-deepwater, gas.

     

    1. Shale gas and tight sands gas are not only vastly more abundant than “conventional” gas but are found in scores of countries: indeed no large country is without these resources and many small countries have notable endowments. In the next 20 years the global natural gas E&P industry will not only be far bigger and more valuable than in 2011 but it will also be much more diversified.  The age of Big Gas is now starting and Big Oil will be more accurately labeled Big Gas within a generation.

     

     

     

     

     

     

     

     

     

     

     

     

     

    Feb 03 3:49 PM | Link | 1 Comment
  • Offshore Oil and Gas: Will Brazil’s Success Be Replicated By Namibia?

    The South Atlantic Margin may be on the verge of becoming a major new source of offshore oil (and perhaps natural gas) reserves and oil exports. The continuing success of Brazil, the recent discoveries in the Falklands and the rapid growth in exploration off shore Namibia suggests that offshore exploration for oil and gas is not only a very young industry but also a very promising one. Even as Washington DC suppresses offshore, especially deep and ultra- deep water E&P, the rest of the world is enthusiastically pursuing it, from Latin America to Israel, from Turkey to South Asia and from Australia to Africa. Where Washington DC wants to go, the world is no longer willing to follow on issue after issue.

     

    Brazil’s success is inspiring imitation

     

    Brazil’s offshore, especially ultra deepwater, oil and gas discoveries are globally famous now. Much of the credit belongs to Petrobras, the state controlled publicly traded, integrated oil  company whose market cap makes it the third most valuable publicly traded energy company in the world( after  ExxonMobil  and PetroChina). Impressed by Brazil’s success several nations have become enthusiastic about offshore E&P in both Latin America and Africa.

     

    The US GOM is still the largest offshore oil production area in the world but Brazil is very close and based on current trends will become the undisputed leader in less than 5 years. This is why Brazil is becoming the model for offshore development even as Texas and North Dakota are becoming the models for oil and gas shale development. Success attracts imitators.

     

     Petrobras is not new to offshore drilling, either in the GOM or Brazil. It discovered the Enchova field in 410 feet of water in 1977 and has been venturing steadily deeper. The Roncador discovered in 2003 is at 6,180 feet and the very impressive Lula field, discovered in 2009 and confirmed in 2010 is in 7,125 feet. Pilot production from Lula has already started. Petrobras operates 20% of all offshore production facilities in the world (almost 4 times as many as BP). Petrobras plans to invest over $100 billion in E&P in Brazil between 2010 and 2014 and double its oil production from the current level of 2 million barrels per day.

     

    Brazil’s offshore discoveries are world class and the vast region called the subsalt (to distinguish it from another huge oil province in the same waters called the presalt, where the recent discoveries such as Lula and Cernambi are located) is still little explored. Petrobras will be the sole operator of all pre-salt fields and own at least 30% of all consortia developing these fields.  The sub-salt is open to foreign operations.

     

    The Tupi field (2006, the first major pre-salt find) in the Santos Basin (5 to 8 billion barrels estimated reserves) made it the largest discovery in the Americas in 35 years. In September 2010, the Brazilian Government announced the discovery of the Libra field (reported at 5.5 billion barrels but already revised up to 8 billion barrels). The Libra is the largest oil field discovered anywhere in the world since the enormous Kashagan find (over 17 billion barrels) in Kazakstan in 2000.

     

    Of course, it is not just Petrobras that is making impressive discoveries in Brazil. Devon Energy has announced a discovery in the pre-salt Campos Basin, quite close to the big Jubarte field. Devon has 7 exploration blocks in Brazil of which 6 are pre-salt. A joint venture involving Repsol, Sinopec, BG Group, with Petrobras as operator and 45% owner,  has made an important discovery of very light oil in the ultra-deep waters of the Santos Basin. Maersk Oil has discovered oil in the offshore Campos Basin in a license jointly owned with the Brazilian independent OGX.

     

    Anadarko Petroleum which owns 7 exploration blocks in Brazil very recently revealed that it has a sub-salt discovery in the Campos Basin.  The significance of this is that the sub-salt is thought by some geologists, both Brazilian and foreign, to have even more oil resources than the pre-salt.

     

    It is only in the past six years that exploration in the sub-salt has been taken seriously. Sub-salt exploration is now increasing and is likely to attract capital and talent from across the world in the next few years. At present the Santos, Campos and Espirito Santos basins are seeing activity but this will expand to Jequitinhonha and Camamu-Almada basins. Current commercial sub-salt production is all in shallow waters.

     

    Brazil’s oil regulator startled the world E&P industry by guessing that the subsalt reserves are 50 billion barrels (compared with the 50 to 100 billion barrel estimate for the much better studied and explored  pre-salt). A Professor at Rio De Janerio State University, with 35 years experience as a Petrobras geologist, thought the guess grossly optimistic and decided to debunk the official estimate via an independent analysis. He ended up astonishing himself and the industry by guessing that the reserves were over 120 billion barrels, according to the CEO of HRT Participacoes em Petroleo , one of Brazil’s largest independent E&P companies.

     

    HRT also claims that yet another tremendous exploration frontier exists in Brazil: the Amazon basin, a great expanse little explored for oil and gas. The Solimoes River Basin is the focus of HRT’s interior exploration. This basin is the third largest oil producing area in Brazil after Campos and Espirito Santos and has Brazil’s third largest gas field.

     

    HRT has also discovered natural gas shale resources in the Solimoes River Basin. These could be very large (HRT estimates 35 to175 trillion cubic feet on its 21 blocks alone). If so, it would not be surprising since we now know that extensive shale resources are found in many parts of the world and the interior of every large nation has such resources. Given Brazil’s rapidly growing internal market for natural gas this resource could find a ready use, displacing imports.

     

    Brazil is fully aware of not just the national but international strategic importance of its offshore energy resources. The country, reportedly, is pondering the construction of a multi-billion dollar underwater base to both protect its offshore treasure and explore under the ocean bed in deep waters for additional resources. The government, Petrobras and the navy apparently are collaborating in designing this base. The base would be continually occupied and serve as combined oceanographic lab and naval outpost on the edge of Brazil’s maritime boundary. It seems that the potential for oil and gas resources in depths at the edge of the continental shelf, about 350 nautical miles from the coast, is very high.  If Brazil starts to assert rights to energy resources in international waters, it will certainly set a global precedent and impel a worldwide rush to stake claims on hydrocarbon resources that belong to no nation and presently are not technologically accessible.

     

     

    Namibia Could Be The Next Major Offshore Play

     

    Directly across the South Atlantic from Brazil is Namibia. Once the two were united so it is only natural that companies should seek to imitate and at least modestly replicate offshore Namibia the successes offshore Brazil.

     

    Namibia (about 1.5 times the size of France physically) is a small country in terms of population (a little over 2 million with a  functioning democracy) but its offshore basins are spread over 500,000 square kilometers and virtually unexplored. Less than 20 exploration wells have been drilled of which 4 are in the commercially producing Kudzu field (bordering South Africa).  The offshore basins are Walvis, Luderitz and Orange (shared with South Africa) moving north to south. Angola to the north is becoming a significant oil play.

     

    Companies ranging from the majors and mini majors to obscure independents have secured or are seeking exploration rights. The state owned company Namcor has mostly an advisory and monitoring role and so far E&P companies have not been forced to offer any participation in prospects to Namcor.  Petrobras and HRT are exploring there (obviously) as are Shell, Gazprom, Tullow, BHP Billiton, Tower Resources, Energulf, UNX Energy, Acarus, Chariot Oil and Gas, AlphaPetro, Arcadia, Pancontinental Oil and Gas PetroSA and Sintezneftgaz.

     

    Namibia’s offshore basins (as do Angola’s just to the north) have characteristics very similar to the Campos and Santos basins. HRT which has blocks in both the Walvis and Orange Basins maintains that the latter is currently the most interesting and potentially the home “giant” oil fields.  UNX Energy agrees with this assessment.

     

    Chariot Oil and Gas, which has 8 blocks in the 3 offshore basins thinks that Namibia’s offshore basins have billions of barrels of recoverable oil resources plus trillions of cubic feet of gas.  Sinteznefgaz(in a consortium with Energulf, PetroSA and Namcor) claims to have found an offshore field with 14 trillion cubic feet of “reserves”. It is not possible to determine how precisely the term”reserves” is being used.

     

     HRT guesses that offshore Namibia has 50 billion barrels of recoverable oil. Such numbers would potentially make the Namibians the richest people, per capita, in Africa.

     

    These are very early days for offshore oil and gas exploration, especially in deep and ultra deep waters not just in Namibia but in much of Africa, Asia and Latin America (this is true for ultra deep waters in the GOM as well). The clear message from Brazil is that the world’s offshore basins may have hundreds of billions of barrels of oil (and vast amounts of natural gas) waiting to be discovered and commercially developed in the next 10 years.

     

    If so, the global offshore E&P industry is about to experience it’s most rapid growth yet and the South Atlantic region  may be poised to become a major exporter of oil and natural gas.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     



    Disclosure: I am long XOM.
    Jan 31 5:11 PM | Link | 1 Comment
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