Skip to comments.The New Oil Majors
Posted on 02/15/2014 6:55:25 PM PST by ckilmer
The New Oil Majors by Jay Yao, The Motley Fool Feb 15th 2014 2:00PM Updated Feb 15th 2014 2:02PM
It takes time to build an empire. Both ExxonMobil and Chevron, the U.S. super-majors of today, trace their history back to the ultimate corporate empire: John D. Rockefeller's Standard Oil, - which was founded more than a century ago.
Unlike asset-light technology companies that can grow quickly, the oil industry is notoriously capital intensive. Because they require so much capital, oil companies generally grow at a slower rate. Most of the large oil fields that can turn wildcatters into giant oil companies overnight have also already been found. So how is it that a new generation of U.S. oil and gas companies are increasingly coming into their own?
The benefit of being nimble $100 billion is about the cumulative market cap of Pioneer Natural Resources , EOG Resources , and Continental Resources . $100 billion is also roughly half of what ExxonMobil spent on share buybacks over the past 10 years.
While conventional wisdom is that big players are more efficient because they have economies of scale and lower costs of capital, it turns out that there are benefits to being small as well. What may seem like a small opportunity can become a large one given the right technological advances and a hospitable regulatory environment.
That is just what happened half a decade ago. It was uncertain how promising shale plays were, and because they had long timelines and needed big projects to move the needle, the super-majors didn't take advantage of the opportunity as aggressively as the smaller players. As luck would have it, those small projects turned out to be huge and turned small companies into the next generation of oil majors.
The shale producers' growth rates are astounding. EOG is growing revenues around 32% year over year. Continental Resources, the largest leaseholder in the Bakken, is growing revenue at an astounding 60% clip year over year . The company's proved reserves increased 38% year over year to 1.08 billion barrels of oil equivalent.
Pioneer Natural Resources, which is growing revenue around 25% year over year, might be the most promising company of the group. The company is one of the leading leaseholders in what it estimates to be the second largest oil field in the world, the Spraberry Wolfcamp field. The field has yet to be fully developed and may contain as much as 50 billion barrels of recoverable oil.
The bottom line There's still room for improvement. With pad drilling and other technological advances, the cost of oil production is still trending lower. And there are risks too, of course. Chief among the risks is increased government regulation; fracking is already banned in New York, andhas a chance of being banned in California.
Some investors are still not convinced of the new oil majors, often using the argument that unconventional wells have faster depletion rates, making the production numbers misleading. While that is true, given the size of the total opportunity, shale oil production will more than likely continue to trend higher for the foreseeable future. Of all the projectionists, Continental Resources CEO Harold Hamm may be the most optimistic. He believes that Bakken shale will eventually produce 2 million barrels/day, about twice what the play is producing now.
Calling the Bakken and Three Forks shale plays in not completely accurate. The formations are better described as unconventional reservoirs which have hydrocarbon saturation over very large areas.
It will be interesting to see what is in Mexico, when/if they ever modify their laws to allow genuine commerce.
It’d be interesting to see what is in the US. Recall this administration has shut down much of the Western US, Alaska, and the Gulf of Mexico (Federal Leases).
if a republican gets into the white house in 2016 the federal lands will become more open to exploration. They might even do it if the pubbies get control of the senate in the fall. Hard to say.
In the mean time nothing is going to happen on federal lands.
The mexican recently did change their laws to allow foreign companies to frack on their lands. Pemex just doesn’t have the technology to do it. The Eagle Ford formation doesn’t stop at the border. It just keeps going south. In a couple years you can bet some of the companies in the eagle ford are going to go south of the border. In the meantime the USA is exporting a lot of natural gas south of the border.
sounds like you have some familiarity with the baaken/three forks formations. I thought that the three forks was at a deeper level than the baaken. seems to me I’ve read that continental has only recently completed some exploratory wells in the three forks lower levels. they have not got to production as yet. And they’re the leaders there.
The leader of continental says that baaken will ultimately double oil output from current 1 million barrel @ day levels. do you agree? What do you think are the total addressable reserves there?
Do you think that technology will improve so significantly over the next ten years that 10 years from now a lot more oil will be “addressable” than is the case today.
In the deeper parts of the Williston Basin, the Bakken is composed of an upper shale layer, the Middle Bakken (varied lithologies--generally dolomite, sand, silt, and limestone, in varied proportions, depending on where you are), and a lower shale. The shales are the source rock for the oil, the more permeable (if only slightly) layers of the Middle Bakken and Three Forks are the reservoirs.
The Three Forks underlies the Lower Bakken Shale.
I have seen hydrocarbon shows 50 ft or more down into the Three Forks in some locations back when we drilled vertical wells, and though the presence of oil at deeper levels in the Three Forks is not as geographically widespread as it is closer to the Bakken, there are some areas where it may be a viable drilling target.
As for reserve estimates, I don't do those on this scale. Even the USGS has had to revisit and revise reserve estimates in the Bakken/Three Forks.
Do keep in mind that the Bakken and Three Forks are only two of over a dozen formations known to produce oil in the Williston Basin, and that equation becomes even more complex.
Daily output may well double as development drilling continues, especially with pad wells going in (multiple wells in the same lease spacing, aimed at better recovery).
I think advancements in recovery techniques will ultimately make processes more efficient, but that the engineering challenges inherent in drilling in hydraulically fractured formations may ultimately limit the well density in any given area.
Initial estimates of actual recovery of oil in place have been exceeded significantly as the process becomes more efficient.
Will it reach the two million BOPD mark? Much depends on having the infrastructure and means to transport the oil. Transportation has been a significant bottleneck since the start of the Bakken play in the Elm Coulee Field in Montana in 1999/2000, and continues to be the fly in the ointment.
Keystone XL has been held up for nearly 10 years, and while other pipeline projects have alleviated the transportation problem somewhat, rail transport continues to be the means to move the production that exceeds the pipeline capacity. As a result, oil which commonly matches the characteristics of WTI (the US benchmark light sweet crude oil) sells for less because of the bottleneck.
Eliminate that transport problem and the incentive will increase as the discounts decrease.
Note that to someone in the industry, the attacks on hydraulic fracturing, the closure of Federal lease areas, the media attacks on rail transport and even pipelines seem to be a systematic attempt to hinder development (on the part of the Federal Government), and mass media attacks on (especially) hydraulic fracturing have had the unfortunate effect of swaying the (otherwise uninformed) public opinion despite the facts (much like Global Warming).
Especially in light of this administration's hostility toward energy forms which can be stockpiled or stored (oil, gas, coal), I do not think this is an accident, but a concerted campaign to convince the general public that the less reliable forms of 'green' energy are somehow preferable.
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