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LINN acquires, develops and maximizes cash flow from a growing portfolio of long-life

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THE EXECUTIVE PUBLICATION FOR THE OIL AND GAS INDUSTRY

APRIL 2015

OPEC THROWS
BOULDER IN RIVER
OF ENERGY CAPITAL

SPECIAL FOCUS:

OFFSHORE RISK

SHALE VS OFFSHORE
GREAT CREW CHANGE
HEDGING SURVEY RESULTS

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Investment and Insurance Products:


Are Not FDIC Insured | Are Not Bank Guaranteed | May Lose Value
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Are Not a Condition of Any Banking Activity

3/31/15 3:25 PM

CONTENTS
V12/N O . 4 | APRIL 2015

THE EXECUTIVE PUBLICATION


FOR THE OIL AND GAS INDUSTRY

FEATURES
18

30

COVER STORY
MANAGING THE CAPITAL CYCLE
EnerComs James Constas offers an in-depth
look at managing the capital cycle, detailing
the need for industry participants to adapt in
the cyclical oil and gas industry.

16

46

PRICE OF CRUDE, COST OF DATA

48

THE GREAT CREW CHANGE

51

OIL AND GAS DISCLOSURE RULES


Part three of a three-part series

SHALE VS. OFFSHORE


Which will prevail in the long-term?

70

28

46

SPECIAL REPORT: MEXICO

OFFSHORE OUTLOOK
Short-term dip, long-term rise

30

FINANCING OFFSHORE ASSETS


Market conditions contrast sharply from
those just a few months ago

33

IMPROVING OFFSHORE OPERATIONS

70

37

ADAPTING TO CHANGES
As complexity grows, companies must focus
on capabilities, flexibility

ON THE COVER
Saudi Arabian
Oil Minister
Ali Al-Naimi

Northfoto/
Shutterstock.com

39

HEDGING SURVEY RESULTS

41

GLOBAL SHALE IS LAGGING


HERES WHY
A proposal for GTW modular development

DEPARTMENTS
6 EDITORS COMMENT
8 CAPITAL PERSPECTIVES
12 UPSTREAM NEWS
14 MIDSTREAM NEWS
54 DEAL MONITOR
56 OGFJ100P
64 INDUSTRY BRIEFS
67 ENERGY PLAYERS
80 BEYOND THE WELL

Oil & Gas Financial Journal (ISSN: 1555-4082) is published 12 times per year, monthly by PennWell, 1421 S. Sheridan Rd., Tulsa, OK 74112. Periodicals Postage Paid at Tulsa, OK, and additional mailing offices. POSTMASTER: send address changes to Oil & Gas Financial Journal, P.O. Box 3264, Northbrook, IL 60065. Change of address notices should be sent promptly with
old as well as new address and with ZIP or postal code. Allow 30 days for change of address. Copyright 2015 by PennWell. (Registered in US Patent & Trademark Office.) All rights reserved.
Permission, however, is granted for libraries and others registered with the Copyright Clearance Center Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, Phone (978) 750-8400, Fax
(978) 646-8600, to photocopy articles for a base fee of $1 per copy of the article, plus 35 cents per page. Payment should be sent directly to the CCC. Federal copyright law prohibits unauthorized reproduction by any means and imposes fines up to $25,000 for violations. Requests for bulk orders should be sent directly to the Editor. Back issues are available upon request.

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EXPERIENCE MATTERS
TRUST YOUR INVESTMENT TO A PROVEN LEADER

Cudd Energy Services has a proven reputation for professionalism, reliability, and
experience. We apply ingenuity and persistence to each operation to help you achieve
the maximum return on your investment. With highly trained, certified crews located
in major resource basins, we stand ready to deliver on time, every time.

  
     
     
  
 

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OGFJ

.com

PennWell Corporation
1455 West Loop South, Suite 400, Houston, TX 77027 USA
Tel: (713) 621-9720 Fax: (713) 963-6285
www.ogfj.com
Vice President and
Group Publisher
Mark Peters
markp@pennwell.com

Associate Publisher
Mitch Duffy
(713) 963-6286
mitchd@pennwell.com

Chief Editor
Don Stowers
dons@pennwell.com

Editor
Mikaila Adams
mikaila@pennwell.com

Editorial Creative Director


Jason T. Blair
Contributing Editors
Laura Bell, David Michael Cohen, Paula Dittrick, Brian Lidsky,
Debbie Markley, Per Magnus Nysveen, Tammer Qaddumi,
Nick Snow, Imre Szilgyi, Don Warlick, John White

FEATURED CONTENT

Get up-to-date news and featured content on OGFJ.com daily.


Find a Q&A series by Locke Lord focused on managing energy
sector distress. Read about recent asset sales by Southwestern
Energy Co., Bentek analysis of flat oil production in the Bakken
and Eagle Ford shale, and much more on OGFJ.com.

SLIDESHOWS
Drawing on the popularity of our Photo of the Day slideshow,
were pleased to provide readers with another opportunity to
scroll through engaging photos attached to intriguing content.
Find our Energy Players slideshow with links to OGFJ interviews
featuring some of the industrys top executives.

COUNTRY REPORTS
Highlighting the oil & gas industries of Norway, Scotland, South
Africa, Mexico, and many more, OGFJs Country Reports page
hosts a diverse selection of reports containing exclusive interviews
with oil and gas leaders from around the world, offering an
insiders view on whats hot in various markets.

GET SOCIAL!
New! Were introducing the OGFJ Showcase Page on LinkedIn.
Follow our page to get the latest news and analysis right on
LinkedIn.com. As always, you can find us on Twitter (@OGFJ)
and Facebook and join other petroleum industry executives,
managers, analysts, and investors looking for credible, useful
information about oil and gas industry developments. Become a
part of our social community and join the discussion today!

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Editorial Advisory Board


E. Russell Rusty Braziel, RBN Energy LLC
Michael A. Cinelli, Locke Lord LLP
Mickey Coats, BOK Financial
Adrian Goodisman, Scotia Waterous (USA) Inc
Cleve Hogarth, Quorum Business Solutions
Bradley Holmes, Investor Relations Consultant
Maynard Holt, Tudor, Pickering, Holt & Co.
Carole Minor, Encore Communications
Jaryl Strong, BHP Billiton
Andy Taurins, Lantana Energy Advisors
John M. White, Roth Capital Partners
Ron Whitmire, EnerVest Ltd.
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Sales Manager
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Official Publication

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3/31/15 3:25 PM

COMMENTARY AND OPINION

In lieu of the cane, a reflection


on conservation policy
REP. ROB BISHOP

EDITORS NOTE: Julia Bell, press secretary to the US House


Committee on Natural Resources, recently sent me this commentary from Rep. Rob Bishop (R-Utah), committee chairman.
I read it and immediately thought it would be an ideal piece to
share with OGFJs readers. So, in lieu of this months Editors
Comment from me, I am donating this space to Congressman
Bishops comments. In the current stalemate between congressional Democrats and Republicans and between the legislative
and executive branches of government, this perspective offers hope that we can, one day, end the current dysfunction in
Washington. Don Stowers, Chief Editor - OGFJ

MORE THAN 200 YEARS AGO, Rep. Roger Griswold of Con-

necticut used his wooden cane to bludgeon Rep. Matthew Lyon


of Vermont on the floor of the US House of Representatives. Had
Griswold any respect for Lyon, he would have challenged him to
a duel.
I raise the Griswold-Lyon affair of 1798 not to commend this
conduct, but to show that despite todays political gridlock, it could
be, and indeed has been, a whole lot worse. As a former history
teacher, I believe history has invaluable lessons for policymakers
because it reveals the range of consequences of policies that have
been put into practice. Beyond mere study, it is through application
of these lessons to the present that policymakers can learn which
principles stand the test of time and which laws must be
modernized.
Republicans and Democrats do have shared goals yes, even
in the oft-controversial realm of energy and environmental
policy.
Both parties treasure our lands and want to see them healthy
and pristine. Both parties want folks to be able to support their
families. When it comes to the current policies that order how we
conserve and utilize our nations resources, however, there is a
major disconnect between our respective goals and solutions.
This debate is mired in the premises and prejudices of the past,
as we rely upon policies that were written for a different time when
our country had different needs. Its an approach that no longer
protects the land, yet leaves powerless the people who use that
land. The sad truth is that a large portion of money spent at the
federal level in the name of conservation and environmental stewardship will never reach the ground, nor deliver tangible benefits
as its consumed by growing litigation costs and layers of prescriptive
environmental regulations that cause more harm than good.
On March 5, Department of the Interior Secretary Sally Jewel
testified on the administrations budget proposal for fiscal 2016
before the House Committee on Natural Resources. After reviewing
6

1504ogfj_6 6

the administrations proposed request over the past month, my


verdict is that it falls flat. Its a budget that looks like it was written
for 1975, not 2016. Instead of addressing ongoing problems with
our federal lands, water, oceans, and energy resources in a meaningful way, this budget proposes throwing thousands of gallons of
cash and miles of new regulatory red tape to address problems
which swallow up the time and resources of agencies like a bottomless pit. It is an example of the backwards thinking that suffocates innovation and ingenuity.
We should not accept a budget that relies upon this paradigm.
I believe our nations leaders can do better.
As chairman of the Committee on Natural Resources, I will not
regard assertions that conservation and economic development
are in opposition. I will not condone rhetoric which hypes the
possible origins of problems over solutions. From mitigating catastrophic wildfires and moving closer to energy independence, to
increasing access to and modernizing our energy infrastructure
on federal lands, we have shared goals and, with any hope, can
move forward together.
As chairman of the Committee on Natural Resources,
I will not regard assertions that conservation and
economic development are in opposition. I will not
condone rhetoric which hypes the possible origins of
problems over solutions. From mitigating catastrophic
wildfires and moving closer to energy independence,
to increasing access to and modernizing our energy
infrastructure on federal lands, we have shared goals
and, with any hope, can move forward together.
Our solutions will emerge from both the creative input of stakeholders and a new vision: 1) People come first in resource, energy
and environmental policy, and stewardship is a shared responsibility; 2) Natural resources give our nation opportunity and security;
3) Public lands, waters, and oceans are meant to be enjoyed by
people and serve our nations needs; 4) Government should empower people who know and love the land, when possible; and
finally 5) Government should be a problem-solver, not a
problem-creator.
Not all will agree on every policy route. That is fine. Disagreement does not quench my real hope that Republicans and Democrats can work together on shared objectives and creative solutions.
People may say this is impossible, but I would point them back to
that winter day in 1798, and posit that if Congress can surmount
the tensions inherent in a public cane-fight, surely my colleagues
in the 114th Congress can overcome whatever political rancor
exists for the sake of a better present and a brighter future for the
American people.
WWW.OGFJ.COM |

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APRIL 2015

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3/31/15 3:25 PM

Yakobchuk | Dreamstime.com

CAPITAL PERSPECTIVES

Unlocking the value of oil and gas hedges


NOW IS THE TIME TO CONSIDER MONETIZING THIS VALUABLE ASSET
AS A SOURCE OF FUNDING FOR 2015 OPERATIONS
JAY SNODGRASS, ENERFI CAPITAL, NEW YORK, NY
AJ MCNALLY, CLEARHEDGING, RED BANK, NJ

WITH WTI BREAKING $45 earlier this year and hovering around

$50 recently, many CFOs will struggle to fund operations in the coming months. In the current pricing environment, it has become more
difficult to generate a positive risk-adjusted return from new drilling.
This has led nearly every company to plan significant reductions to
drilling budgets for the coming year.
Many companies, however, have existing obligations that leave
them little choice but to either drill uneconomic wells, pay delay rentals, or risk losing valuable leases. With capital markets closed to all
but the highest-rated companies, many CFOs are considering nontraditional funding options to meet these obligations.
Fortunately many prudent operators put into place hedges that
have insured cash-flows during this period of depressed commodity
prices. However the value underlying these hedges is only realized on
a month-to-month basis as contracts expire. For companies with
ample liquidity this is fine, and monetizing hedges for these firms is
generally not recommended as there is a cost to the process. However, for firms in need of immediate capital, hedge monetization can
8

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provide a significant lump-sum payment. Further, the cost is typically


lower than alternative sources of capital and can be completed in a
matter of days rather than weeks or months.
Maximizing net proceeds from a hedge book monetization requires specialized expertise and finesse. The first step in the process
is to calculate an accurate valuation of the existing portfolio of hedges. Next its important to structure a new dynamic hedging program
to ensure that production continues to be hedged throughout this
volatile period. In addition, companies that have credit facilities in
place will need to negotiate with lenders to minimize a likely reduction in borrowing base. Finally, its important to minimize execution
costs through price negotiation with counterparties, which can result in tens of thousands of dollars of additional liquidity.
Accurately valuing the existing hedge portfolio is critical as this is
the source of proceeds. Most counterparties are large commodity
trading desks that use sophisticated models to value hedge portfolios. As with any over-the-counter product, the pricing of derivative
contracts is inefficient. Operators that arent able to accurately value
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The Missing Piece


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CAPITAL PERSPECTIVES

their portfolio prior to negotiating the unwinding with counterparties are at a significant disadvantage and could be leaving substantial
money on the table. Given the complexities involved, its generally
advisable to have an independent qualified advisor on hand to ensure best practices are implemented and maximum valuation
achieved.
During the monetization process many companies will be tempted to believe that oil has found a floor or that it cant go any lower
and will therefore be reluctant to put on new hedges. This is a dangerous trap that can spell future disaster. Hedging against lower prices is
insurance against the systemic risk of an uneconomic business. Each
operator has different pain points and the new hedge program
should be customized to protect against those particular pain points.
Its important for operators to understand that hedges are simply
an asset, in the form of insurance, that in most cases today has paid
off handsomely.
Now is the time for many oil and gas companies to consider
monetizing this valuable asset as a source of funding for 2015 operations. Companies such as EnerFi Capital, ClearHedging, and others
provide independent advice to operators interested in maximizing
net proceeds from hedge monetization and implementing a dynamic hedge program to achieve ongoing protection throughout
this volatile period.

ABOUT THE AUTHORS

Jay Snodgrass (jay@enerficap.com) is an investment


manager, speaker, and writer. He is the founder and
principal of EnerFi Capital, which provides specialized
financial advisory services to clients in North American oil and gas development. Previously, Snodgrass
worked in upstream private equity focused on joint
venture investments in onshore drilling. He earned a BBA degree in
finance and CIS from the University of Miami.
AJ McNally (aj@clearhedging.com) is the founder of
ClearHedging. He brings a depth of experience in analytical research, client relationships, leadership, management, and market knowledge. He began his career
in New York City with E.F. Hutton and Citibank as an
equity analyst where he valued and sold assets heldin
trust and estates. In his 30-year trading career, McNally has traded
futures and options on the NYMEX, COMEX, and NYBOT in various
energy, metal, and soft products, including natural gas, crude oil,
gold, silver, cotton, and sugar. He holds a degree from Villanova Universitys business school.

 
     
 
     


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UPSTREAM NEWS

B RIEFS
GULF OF MEXICO
DRILLING SALE
Forty-two companies
pledged $583.2 million
bidding on 169 central
Gulf of Mexico tracts
during a government
auction that took place
on March 18. The government is set to collect
approximately $538.8
million in expected
winning bids, down
significantly from a
March 2014 central Gulf
of Mexico auction that
raked in $850.8 million
in winning bids from 50
companies.
2015 WORLD OIL
DEMAND UP SLIGHTLY
OPEC adjusted its 2015
world demand forecast
slightly higher, to 92.32
MMbpd. Demand by
developing countries
is expected to outpace
growth rates from China,
which is expected to
experience another
round of decelerated
demand growth. OPEC
is forecasting 820,000
bpd of YoY growth in oil
demand from developing countries in 2015,
well ahead of the 310,000
bpd growth expected to
be seen by China.

DOUGLAS WESTWOOD: UK OFFSHORE OIL


& GAS WHAT NEXT?
The low oil price is expected to dramatically impact O&G activity on the UKCS. Most notably,
the number of wells drilled will decrease particularly E&A wells. In 2014, drilling campaigns
were significantly smaller than forecast only 14
exploratory wells were drilled from an anticipated
25. This is the lowest number since 1970 and with
the current oil price an increase is highly unlikely.
However, production is expected to be maintained over the short to mid-term, bolstered by
sanctioned projects. Meantime operators are
seeking to control costs BP and Talisman have
recently announced large job cuts and many high
CapEx developments will face delays.
Despite the downturn, the 28th licensing round
(Nov 2014) appears to indicate continued Operator interest. DECC awarded a total of 134 licenses
fewer than the record 27th round in 2012 but
still demonstrating the ongoing attractiveness of
the region. This does not mean drilling will return
to higher levels: the majority of licenses were
awarded on the basis of further analysis of seismic
data. Overall, oil companies committed to just
five firm wells and four contingent wells. Given
the declining oil price and current unattractive
fiscal regime, a lack of commitment from oil companies is to be expected. However, the lack of
drilling activity still represents a significant concern for the UK industry and encouraging companies into drilling will require careful restructuring of both the fiscal and regulatory framework.
Chancellor George Osborne, in his Autumn
Statement, announced plans to revise the fiscal
regime and appoint a new regulator. However,
given the steep decline in oil price, more needs
to be done, particularly on taxation indeed Lord
John Browne recently suggested cutting through
the tax complexity and putting it onto a corporation tax basis. However, much depends on the
outcome of the general election anything but
a win for Conservatives may delay much needed
reforms and suppress the UKCS O&G industry
further.
MEXICOS BIDDING ROUND
FOR SHALLOW WATER KICKS OFF
The Mexican National Hydrocarbons Commission
recently published the bidding and contract terms
for the first 14 oil and gas areas in shallow waters,
kicking off the first phase of Mexicos bidding
round for exploratory oil and gas blocks in the
Gulf of Mexico.

12

1504ogfj_12 12

However, with the recent plunge in oil prices,


many are speculating whether major international
oil companies will continue to show interest in
the initial phase of the bidding round. Mexico
took note and revised its initial offering by eliminating a few costly shale fields from its private
oil tenders.
In the past week, the government has admitted that it may need to further delay high-cost
areas, such as unconventionals, stated Adrian
Lara, GlobalDatas senior upstream analyst for
the Americas, in a released statement. On top
of this, the new schedule appears ambitious for
a regulatory agency organizing its first-ever licensing round.
Despite these delays, the lower oil price should
not affect the competitiveness of bidding on the
shallow-water exploration blocks where production costs are less than $20/bbl, remarked Juan
Carlos Zepeda, head of the National Hydrocarbons Commission. NHC is the regulatory overseeing Mexicos Round One.
Several major companies, including ExxonMobil, Chevron Corp., Shell, Ecopetrol SA, and BG
Group have paid a $350,000 fee (on top of a
$18,600 registration fee) for access and authorization to the data room that houses seismic and
geological data that has been the exclusive preserve of state oil company PEMEX for nearly eight
decades.
Companies are slated to review the material
which will open up to the bidding and contract
terms for the first 14 oil and gas areas in shallow
waters in the first phase of round one. According
to a recent Mayer Brown report, these exploratory
areas, located off the coast of the states of Veracruz, Tabasco, and Campeche in southeast Mexico, hold prospective resources that are expected
to contain light crude oil with low production
costs. Each contract area is subject to different
minimum investment obligations.
In the first round, the bidding process is divided
into the following five different phases: Shallow
waters, extra-heavy oil, Chicontepec Basin and
unconventional resources, onshore deepwater.
PEMEX, like other companies, can bid on no
more than five of the 14 areas on offer in the first
tender. But with the depressed oil prices, authorities were redefining what can be offered, stated
Zepeda. The Eagle Ford shale has geological
continuation of formations that cross into Mexico,
but technical challenges, including lack of infrastructure and water and swift production times
correlate to costs that are not attractive during a
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UPSTREAM NEWS

down cycle. The commission along with the Energy Ministry will decide by 2Q 2015 which areas
will be trimmed.
The first deepwater Mexican prospects due to
be auctioned later this year remain attractive even
in the current environment because production
is at least eight years away, meaning current prices
are less relevant to exploration budgets for companies assessing their existing portfolios.
Moreover, in 2015, Mexico plans to award permits for companies to conduct seismic studies,
including an assessment of presalt prospects.
Two-dimensional and 3D studies conducted by
outside parties will be a first for the country.
I think what Mexico has accomplished recently
is outstanding for two reasons: a) the number of
years that the Mexican industry has been closed
and b) the emblematic nature of oil in Mexico,
stated Gabriel Salinas, associate, Mayer Brown,
to Offshore. In one year, a major reform occurred
with new energy laws and regulations set in place.
Theyve done their homework and Im excited to
see this process begin.
Robin Dupre, Offshore
IEA RAISES FORECAST FOR OIL DEMAND
Having bottomedout in the second quarter of
2014, global oil demand growth has since steadily
risen, with yearonyear gains estimated at around
0.9 MMbpd for the final quarter of last year and
1.0 mb/d for the current quarter, said the International Energy Agencys (IEAs) Oil Market Report
for March. The forecast of demand growth for all
of 2015 was raised by 75 kb/d to 1 MMbpd, bringing global demand to an average 93.5 MMbpd.
Global supply rose by 1.3 mb/d yearonyear
to an estimated 94 MMbpd in Feb., led by a 1.4
MMbpd gain in nonOPEC output. Declines in
the US rig count have yet to dent North American
output growth. Final Dec. and preliminary current-quarter data show higherthanexpected US
crude supply, raising the 2015 North American
outlook.
OPEC crude output edged down by 90 kb/d
in February to 30.22 mb/d, as losses in Libya and
Iraq offset higher supply from Saudi Arabia, Iran,
and Angola. The slightly higher demand forecast
has raised the call on OPEC crude for the second half of 2015 to 30.3 MMbpd, above the
groups official 30 mb/d target.
Global crude refinery throughputs estimates
have been raised to 77.8 MMbpd for the current
quarter and 77.3 MMbpd for the second quarter
on sustained high margins and a slightly more
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robust oil demand outlook. Annual gains are


forecast at about 1 MMbpd for the first half of
2015, down from a sharp 2.2 MMbpd the final
quarter of 2014 and in line with projected oil
product demand growth.
OECD commercial stocks rose by a weaker
thanaverage 23.1 MMbbl in Jan. US crude stocks
rose to a record 72 mb surplus.

WOODMAC: OIL SANDS CASH FLOWS


TO FALL BY $23B IN NEXT TWO YEARS
The operational cost of extracting bitumen from
Canadas oil sands tops out at $37 per barrel for
in-situ projects and $40 per barrel for mining
projects, according to Wood Mackenzie.
Callan McMahon, principal analyst Wood
Mackenzie, says this is among the highest of all
project types globally. With low oil prices, the
oil sands regions cash flows will fal l by $23 billion
in 2015 and 2016 combined, he said.
The firm forecasts that capital spend in the
region will fall by $1.5 billion over the next two
years (4% from 4Q14 assumptions), but it sees
limited impact on production.
Even if projects temporarily operate at a loss,
shut-ins are not expected; and with the costs
sunk, projects totaling 458,000 b/d of bitumen
are set to start production in 20152016, McMahon said. In addition, the analysis highlights that
decreased investment will show post-2017, and
the 4 million b/d peak bitumen production previously expected in 2020 by Wood Mackenzie has
now been pushed out to 2024.
The oil sands remain viable long-term: An
average point forward breakeven for an onstream
in-situ project is $41/bbl and the average point
forward breakeven for an onstream mine is $47/
bbl (WTI indexed), but full-cycle breakevens can
exceed US$100/bbl for both project types.
Larger and diversified companies better positioned to weather the storm: Imperial, CNRL,
Suncor, and Shell each still hold over $20 billion
in post-tax remaining NPV10 in the region.
To date, over $35 billion of value has evaporated from the region. If prices stay low, at a $60/
bbl real flat price deck, the firm calculates that
another $121 billion could be at risk, which equals
with the Eagle Fords remaining value. Companies
looking for the exit might find limited options:
The large amount of investment made in the past
decade by the potential suitors and the unique
expertise required to develop this high-cost resource are both significant headwinds.

BR I E F S
BOTTOM FOR OIL
SERVICE STOCKS
In a February report,
Sterne Agee analysts
looked at rig momentum as a factor to help
indicate where the oil
service industry would
hit bottom. One key
factor historically linked
to the bottom for oil
service stocks has been
a slowdown in the pace
of the drop in rig activity.
Owing to the historically
sharp decline in activity,
this point will likely arise
sooner in this downturn
than prior drops, the
analysts noted. At the
time of the report, the
industry began to see
signs of deceleration in
the pace of the rig count
decline.

13

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MIDSTREAM NEWS

B RIEFS
WOODSIDE CLEARED
TO ACQUIRE
APACHES STAKES IN
LNG PROJECTS
The Australian Competition and Consumer
Commission (ACCC)
said March 5 that it will
not oppose Woodsides
proposed acquisition of
Apache Corp.s interests
in the Wheatstone, Balnaves, and Kitimat projects. The Wheatstone
and Balnaves projects
are located in the Northern Carnarvon Basin, offshore Western Australia,
while the Kitimat project
is located in British
Columbia, Canada.
Woodside and Apache
overlap in the wholesale
supply of natural gas to
the domestic market in
Western Australia. While
the ACCC determined
that the proposed
acquisition would be unlikely to raise significant
competition concerns, it
acknowledged concerns
expressed by the market
about the effects of any
further industry consolidation.

TEXAS LNG FILES WITH FERC


TO COMMENCE PREFILING PROCESS
FOR BROWNSVILLE LNG PROJECT
On March 9, Texas LNG Brownsville LLC initiated
the US Federal Energy Regulatory Commission
pre-filing process, starting the regulatory review
for the proposed liquefied natural gas (LNG)
export facility in Brownsville. Texas LNG plans
to build the Brownsville project in two phases,
each with LNG production of 2 million tonnes per
year (MTA). Pending FERCs final approval to
construct the project, Phase 1 is expected to
commence production in 2020.
Texas LNG has executed an amendment to its
Option to Lease Agreement with the Brownsville
Navigation District in Cameron County to upgrade
to a 625 acre site with deepwater frontage to the
Port of Brownsville shipping channel. The new
site is located approximately five miles from the
mouth of the Gulf of Mexico on the north side of
the channel.
Texas LNGs equity and engineering partner,
Samsung Engineering Co. Ltd. has assigned a
team of engineers and project staff at its Global
Engineering Center in Seoul, Korea to lead the
engineering phase of the project with support
from its Houston-based North American headquarters. As of the end of February 2015, Samsung Engineering has completed four months
out of the 12 month Front End Engineering and
Design study and over 50,000 cumulative manhours of engineering. Texas LNG is being supported by its owners engineer, Braemar Engineering, and environmental consultant, Natural
Resource Group (NRG).
ENCAP FLATROCK INVESTS UP
TO $750M IN MODA MIDSTREAM
Moda Midstream LLC, a liquids terminaling and
logistics provider, has secured an initial equity
commitment of $750 million from EnCap Flatrock
Midstream and the Moda management team.
Moda was formed earlier this year to provide
independent terminaling, storage and distribution
solutions to refiners, petrochemical manufacturers, marketers and producers of crude oil, condensate, NGLs, refined products and other bulk
liquids. Modas expertise includes deepwater
vessel loading and unloading, storage, blending,
processing and pipeline operations.
Moda Midstream is led by its four founding
partners, president and CEO Ken Owen; senior
vice president of commercial and business development Bo McCall; senior vice president and

14

1504ogfj_14 14

CFO Jon Ackerman; and senior vice president


and COO Javier del Olmo. Modas founding
partners worked together as members of the
executive team at Oiltanking North America LLC
and its publicly traded affiliate, Oiltanking Partners
LP.
Moda Midstream was advised by Vinson &
Elkins and Crain, Caton & James. EnCap Flatrock
was advised by Thompson & Knight.

ANADARKO JOINS MAGELLAN,


PLAINS ALL AMERICAN TO BUILD
SADDLEHORN PIPELINE
A wholly-owned subsidiary of Anadarko Petroleum Corp. has exercised its option to purchase
a 20% equity interest in Saddlehorn Pipeline Co.
As a result, the equity ownership in Saddlehorn
will be 40% Magellan Midstream Partners, 40%
Plains All American Pipeline LP, and 20%
Anadarko.
Saddlehorn is a limited liability company that
will construct, own and operate the Saddlehorn
pipeline, an approximately 550-mile pipeline that
will transport various grades of crude oil from the
DJ Basin, and potentially the broader Rocky
Mountain area resource plays, to storage facilities
in Cushing, OK owned by Magellan and Plains.
The 20-inch pipeline will have an ultimate capacity
to transport up to 400,000 barrels per day (bpd),
but the initial capacity of the Saddlehorn pipeline
is expected to be closer to 200,000 bpd.
An extension to Carr, CO is also under consideration for connection to existing crude oil
assets owned by Plains in that region.
The project is currently estimated to cost between $800 million and $850 million. Magellan
will serve as construction manager and pipeline
operator of the Saddlehorn system. Subject to
necessary permits and regulatory approvals, the
Saddlehorn pipeline is expected to be operational
during mid-2016.
EQT TO SELL WEST VIRGINIA
GATHERING SYSTEM FOR $1B
EQT Midstream Partners LP has agreed to acquire
the Northern West Virginia Marcellus Gathering
System from EQT Corp., along with a preferred
interest in an EQT subsidiary, for $1.05 billion.
EQT will receive $997.5 million in cash and $52.5
million in common and general partner units. In
addition, the partnership will fund $370 million
of system expansion projects over the next several
years.
The gathering system was designed and conWWW.OGFJ.COM |

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MIDSTREAM NEWS

structed to gather natural gas production in the


wet gas and dry gas regions of the Marcellus;
specifically in the Saturn, Mercury, Pandora, and
Pluto development areas. The system includes
70 miles of natural gas gathering pipeline and
nine compressor units with 25,000 horsepower
of compression. In addition, the system includes
a 30-mile, high-pressure wet gas header pipeline
that moves wet gas from the development areas
to the MarkWest Mobley processing facility. EQT
contracted for 10 years of firm capacity on the
system.
EQT Midstream Partners LP expects to install
100 miles of gathering pipeline and five compressor units with 23,700 horsepower of compression
over the next several years. Ongoing maintenance
capital expenditures related to the system are
forecast to be less than $5 million per year.
EQT currently holds 76,000 net acres in northern West Virginia that surround the acquired
gathering system, including 59,000 net undeveloped acres. As of Dec. 31, 2014, there were 199
Marcellus wells and 20 Upper Devonian wells
being serviced by the gathering system, with an
average daily gathered volume of approximately
410 MMcf per day.
The terms of the acquisition were approved
by the Conflicts Committee of the board of directors of EQT Midstream Services LLC, the general partner of the Partnership (General Partner),
which is composed entirely of independent directors. The committee was advised by Evercore
Group LLC regarding financial matters; and Richards, Layton & Finger PA regarding legal matters.
The General Partner and its affiliates were advised
by Baker Botts LLP.
BEAR HEAD LNG RECEIVES
PERMIT TO CONSTRUCT
The Nova Scotia Utility and Review Board (UARB)
has issued Bear Head LNG Corp. an updated and
amended Permit to Construct, making the project
the first in Eastern Canada to be granted such
authorization. The approval followed a recommendation from Lloyds Register, the UARBs
certifying authority. Bear Head LNG has now
obtained nine of the 10 initial Canadian federal,
provincial, and local regulatory approvals needed
to construct a liquefied natural gas export facility
on the Strait of Canso in Nova Scotia.
The UARB first permitted Bear Head LNG as
an LNG import facility in 2005. Facilities were
partially constructed and have been kept in hot
idle status since 2008. The UARB previously
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granted extensions of the Permit to Construct in


2009 and 2013. On February 9, 2015, the Canadian
Environmental Assessment Agency (CEAA) issued
a letter concluding that the Bear Head LNG project is substantially the same as the project previously approved by CEAA. As a result, no further
agency review is required.
The last of the 10 initial Canadian environmental and engineering approvals required is an updated and amended registration document which
will soon be filed with Nova Scotia Environment
(NSE), the provincial government department
with a broad mandate to protect the
environment
Bear Head LNG has submitted project description information to the department and anticipates NSE approval of this permit amendment
in the second quarter of this year. Once constructed, the Bear Head LNG project will have an initial
production capacity of 8 million tons per annum
(mtpa) of export LNG.
Project timing depends on regulatory approval,
as well as contracts with gas suppliers and LNG
buyers. Without major delays in the regulatory
process, the facility would be in operation by
2019.
The Bear Head LNG site is located on the Strait
of Canso in Point Tupper, Richmond County, Nova
Scotia, which is about half the shipping distance
to major European markets compared to US Gulf
Coast ports, and is closer than its North American
competitors, including those in British Columbia,
to other burgeoning natural gas markets such as
India.
HEP EXPANDS INTO MARCELLUS
Howard Midstream Energy Partners LLC has executed a definitive purchase and sale agreement
with Southwestern Energy Co. to purchase the
companys northeast Pennsylvania natural gas
gathering assets in Bradford and Lycoming counties for $500 million. The systems, serving the
Marcellus region, include 100 miles of natural gas
gathering pipeline, with nearly 600 MMcf/d of
capacity. In addition to the existing systems, HEP
plans to design, construct, and operate a new
natural gas gathering system for Southwestern
Energy in Tioga County. Once fully operational,
the new system is expected to add up to 380
MMcf/d of capacity in the area. The transaction
is expected to close 2Q15. HEP, which is based
in San Antonio, Texas, plans to open an office in
Pennsylvania upon the transactions closing.

BR I E F S
ENLINK COMPLETES
CORONADO
ACQUISITION
The EnLink Midstream
companies, EnLink
Midstream Partners LP
and EnLink Midstream
LLC, have completed the
acquisition of Coronado
Midstream Holdings LLC,
which owns natural gas
gathering and processing facilities in the Permian Basin, for approximately $600 million.
WILLIAMS SEEKS
FERC APPROVAL FOR
PIPELINE EXPANSION
Williams said March 19
that Transco has filed an
application with the US
Federal Energy Regulatory Commission (FERC)
for its Dalton Expansion
Project, which would
support providing Marcellus shale gas to the
Southeast for electricity
generation and local
natural gas distribution.
Construction is planned
to begin in the third
quarter of 2016, with
completion targeted
for 2017, subject to all
necessary or required approvals by FERC and all
other regulatory bodies.

15

3/31/15 3:25 PM

Offshore vs. shale


WHICH WILL PREVAIL IN THE LONG-TERM?
PER MAGNUS NYSVEEN AND LESLIE WEI, RYSTAD ENERGY

16

1504ogfj_16 16

companies have reduced expenditures by ~30%, and non-shale counterparts have


decreased their expenditures by 11%. This implies that shale-focused companies
are more flexible to a short-term price collapse and are able to be more reactive
in the budgeting.
Companies with exposure to both shale and offshore production (ConocoPhillips, Noble Energy, and Murphy Oil), have decreased their budgets for shale spending by ~50% in 2015, but only adjusted the offshore budget by ~10%. This reflects
the flexibility of each segment. Operators can drop shale rigs more quickly than
offshore rigs due to contract agreements and have fewer commitments when it
comes to infrastructure.
F1: GLOBAL OFFSHORE AND SHALE E&P INVESTMENTS
400
350

Offshore
Shale

300
US$ Billions

E&P companies have guided considerable cuts in their 2015 investment budgets. Preliminary budgets indicate a
~20% drop in global E&P investments
this year, with shale declining the most.
Does this mean offshore is more
competitive than shale, and how have
these sources performed historically?
Observing historical trends, Figure
1 shows global investments for offshore
and shale oil and gas. During the past
decade, offshore investments have increased from ~ US$150 billion in 2005
to ~ US$360 billion in 2014. The growth
in offshore investments is a combination of higher activity and higher unit
costs (i.e., rig rates). Also over the last
10 years, shale activity accelerated as
horizontal hydraulic fracturing became
proven and economical. As a result,
investments increased from almost
zero to ~ US$160 billion in 2014.
Figure 2 shows the change in production resulting from investments. While
incurring increasingly more costs
throughout the period, offshore production remained largely unchanged
at 27 MMboe/d. Shale production, on
the other hand, showed robust growth,
increasing from less than 100 kboe/d
in 2006, to an estimated ~7,500 kboe/d
in 2015. The reactiveness of the production to the investments is largely a factor of the life cycle.
Offshore drilling has been prevalent
since the 1960s and has a large accrual
of declining legacy wells. Each year,
operators must drill more wells just to
offset the natural decline from historical wells. Shale is relatively immature,
with significant activity levels starting
in 2008. Therefore, operators are able
to build up production with each new
well drilled.
Looking into short-term investment
budgets, 2015 E&P activity will be ~20%
lower than 2014 levels. Shale-focused

250
200
150
100
50
0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Rystad Energy UCube

F2: GLOBAL LIQUIDS PRODUCTION FROM OFFSHORE AND SHALE


30,000
25,000
20,000
kbbl/d

AS A RESPONSE to lower oil prices,

15,000
10,000
5,000
0

Offshore
Onshore
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Rystad Energy UCube


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Companies with exposure to both


shale and offshore production
(ConocoPhillips, Noble Energy,
Murphy Oil), have decreased their
budgets for shale spending by
~50% in 2015, but only adjusted
the offshore budget by ~10%. Operators are able to drop shale rigs
more quickly than offshore rigs due
to contract agreements and have
fewer commitments when it comes
to infrastructure.

Over the last five years, shale has


experienced extraordinary development, delivering much higher production growth than offshore. The flexibility of this source gives operators the
option to reduce activity quickly when
prices drop. In terms of economics,
shale is still a very competitive source
of production and will be the fastest to
recover once oil prices increase.
It is clear that operators are able and willing to decrease shale activity faster
than offshore activity, but it is still important to review the economics of each
source. Figure 3 looks at three economic performance benchmarks: break-even
oil prices, payback time, and IRR. Shale and ultra-deepwater fields have the lowest
break-even prices at US$61 and US$64, respectively. In terms of payback years,
shale is much more attractive with four years before payback, assuming an oil
price of US$70/bbl, compared to 11 years for ultra deepwater.
F3: KEY ECONOMIC METRICS FOR SHALE AND OFFSHORE
Principal
source

Brent breakeven
oil price*
USD/bbl

Shale/
tight oil

Ultra
Deepwater

35%
24%

10%

12

13%

12

77

14

9%
19%

64

14%

11

71

Deepwater

IRR*
%

90 USD/bbl
70 USD/bbl

61

Shallow
water

Payback time*
Years

11

14%

*Estimates are based on the 30 largest projects within each group expected to start up
in the period 2014-2020.

ABOUT THE AUTHORS

Per Magnus Nysveen is senior partner and head of


analysis for Rystad Energy.
He joined the company in
2004. He is responsible for
valuation analysis of unconventional activities and is in charge
of North American Shale Analysis. Nysveen has developed comprehensive
models for production profile estimations and financial modeling for oil and
gas fields. He has 20 years of experience
within risk management and financial
analysis, primarily from DNV. He holds
an MSc degree from the Norwegian
University of Science and Technology
and an MBA from INSEAD in France.
Leslie Wei is an analyst at
Rystad Energy. Her main
responsibility is analysis of
unconventional activities
in North America. She
holds an MA in economics
from the UC Santa Barbara and a BA
in economics from the Pennsylvania
State University.

Source: Rystad Energy research and analysis


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3/31/15 3:25 PM

Ali bin Ibrahim Al-Naimi, Saudi Arabias


Minister of Petroleum and Mineral
Resources since 1995, arrives at an OPEC
meeting in Vienna, Austria. Al-Naimi
served as president and CEO of Saudi
Aramco prior to his appointment as oil
minister. Northfoto/Shutterstock.com

Managing the capital cycle


CYCLICAL OIL AND GAS INDUSTRY REQUIRES ADAPTABILITY BY INDUSTRY PARTICIPANTS
JAMES CONSTAS, ENERCOM INC., DENVER

CAPITAL IN the oil and gas industry can be likened to water, in

that it flows from markets to companies and is then invested into


finding and developing resources. Water is energy and just over
100 years ago river resources were harnessed to power sawmills
and grain mills. Water is still required to grow food, of course, and
irrigation remains a key ingredient in feeding six billion hungry
mouths in the modern world.
Today, those mills are powered by electricity, some of which is
generated by hydroelectric dams, but increasingly more likely
created by natural gas-burning generators. Water follows its own
cycle, and so does capital. If water seeks the lowest point driven
by gravity, then capital allocated by managers seeks the highest
returns, and generates more value (i.e., return on capital) that can
be reinvested into more projects, perpetuating the cycle, so long
as there is demand for the resource. Perhaps in no other industry
than oil and gas is the capital cycle on full display.
Since 2008, a river of capital has flowed into the upstream sector
of the North American oil and gas industry. One large boulder that
fell into this metaphorical river, however, was OPECs 2014 Thanksgiving Day Turkey Surprise in which swing producer Saudi Arabia
18

1504ogfj_18 18

decided against cutting crude production, even symbolically, to


defend oil prices. Foreshadowing Saudi Arabias thinking about
crude oil prices, on Feb. 4, 2011, Saudi Arabian Oil Minister Ali
Al-Naimi said prices nearer $75 would be appropriate. On Feb. 3,
2011, Brent was at US$103.37 in intra-day trading. Brent closed at
US$55.91 on Mar. 8, 2015.
Proving that sometimes doing nothing is an act in itself, the
futures markets took the November 27, 2014, OPEC non-decision
as confirmation that oil markets were oversupplied, which led to
the current environment of weak commodity prices. West Texas
Intermediate, the primary North American crude benchmark,
closed at $48.84 per barrel on March 13, 2015, 54% lower than the
same time last year.
The crude oil price drop has disrupted the flow of funds to
projects worldwide and resulting in significant losses of jobs and
value. At Mar. 13, 2015, the market value of US independents was
$144.8 billion lower than the same time last year, a stunning 25%
loss of value for a 78-company subset of EnerComs E&P database.
The stock prices of only six E&Ps rose during the 12-month period,
and the magnitude of losses ranged from a low of minus 3.8% to a
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OIL & GAS FINANCIAL JOURNAL

F1: WHAT IS A GROWTH COMPANY?


140.0%

3-year shale price appreciation

120.0%

R2 = 0.7741

100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100%

50%

0%

50%

100%

150%

200%

250%

300%

3-year debt-adjusted production growth per share

F2: US E&P CAPITAL RAISES


100%

IPO

Secondary equity

Debt

90%
80%
Millions of dollars

high of minus 91.9%.


The action of one country making unilateral policy for one global commodity has
produced profound effects on an entire
industry, not to mention government receipts, employment, and consumer spending. If we needed any reminder that we live
in a global village, the action of one country
has indeed impacted the entire world.
The reaction to the new price environment has been swift and decisive. On Friday,
Mar. 13, 2015, the Baker-Hughes oil rig
count stood at 866, a 56-rig drop from the
previous week and 595 lower than the same
time last year, equivalent to a 41% decline.
We have to look back to Oct. 2, 2009, to find
the oil rig count at current levels, and then
WTI was $107.94 per barrel.
From a purely rational economic point
of view, the industry has reacted exactly as
an economist would have predicted. As
price-takers, oil and natural gas producers
have little to no control over the price of
their products. Falling commodity prices
are tantamount to transforming a life-giving
rain shower capable of recharging the river
of capital into a light drizzle, insufficient
for generating funds for reinvestment and
eroding the returns on development
drilling.
As a client CEO said to us in San Francisco during EnerComs The Oil & Services
Conference, This isnt a cycle. This is a
steamroller that just hit us.
Looking back at the 12-month forward-curve for crude oil prices (WTI) starting in January over the past five years, the
forward curve has been in some form of
backwardation (excluding geo-political
spikes) between 2012 and 2015. Starting
around the beginning of January 2015, the
curve was in contango, and CFOs could
lock in higher future oil prices tomorrow
than at spot prices today.
In the current environment, management teams have substantially cut capital
allocated to drill and pivoted towards capital preservation for enduring this current
down cycle. In this article, we examine what
management teams are doing to achieve
these goals and share some observations
on the cycle of conserving, raising, allocating, and generating capital in the upstream
sector.

70%
60%

$45,932
$37,246

$39,233

$60,843

$41,469

50%
40%
$37,786

30%
20%

$12,299

$14,296

$4,429

$3,465

$5,587

$3,511

2010

2011

2012
Year

2013

10%
0%

$14,522

$15,978
$12,684
2014

THE SILENT THIEF

Inflation has often been called the silent thief, to describe the pernicious effect of rising
prices on household budgets, especially those on fixed incomes. In the oil and gas business,
resource depletion is the silent thief that works against corporate growth goals.
In many ways, the upstream business behaves like the car business. We have all been
seduced by the aroma of new car smell, that alluring combination of aromas from new
plastic, supple leather seats, and fresh carpet. Combined with an exterior free of parking
lot dings and paint chips on the outside and a Blaupunkt premium sound system that
makes us feel like we are listening to Pavarotti at Carnegie Hall on the inside, suddenly
were hooked! Once we drive off the lot, our rolling opera house instantly loses 20% of its
value. In two years, we will be fortunate if our vehicle loses only 30% of what we paid on
the showroom floor.
Since most unconventional wells drilled in North American resource plays will produce
about 30% of their total estimated recovery within the first two years, suddenly a 20%
depreciation hit on a new car doesnt sound all that bad. In fact, EnerComs well economics
model for the typical Bakken oil shale well forecasts a 65% first-year decline in the production rate and estimates total production of 220,000 barrels of oil equivalent in the first

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F3: NET DEBT/EBITDA (TTM 9/30/14)


25.0x

Companies operating primarily in resource plays


Median net debt/EBITDA 2.0x

15.0x

10.0x

5.0x

0.0x

5.0x

A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
X
Y
Z
AA
BB
CC
DD
EE
FF
GG
HH
II
JJ
KK
LL
MM
NN
OO
PP
QQ
RR
SS
TT
UU
VV
WW
XX
YY
ZZ
AAA
BBB
CCC
DDD
EEE
FFF
GGG
HHH
III
JJJ
KKK
LLL
MMM
NNN
OOO
PPP
QQQ
RRR
SSS
TTT
UUU
VVV

Avg. change in equity prices

20.0x

two years of its life, or about 30% of the wells total estimated ultimate
recovery (EUR).
Although we write for a savvy audience, emphasizing the decline
curve at the outset is important, because it is fundamental for
understanding the challenges, opportunities, and risks involved in
capital allocation and financing growth.
Merely holding production flat, however, is not an option for
most independent E&Ps. As public companies, their mission is to
grow and the target capital market for these companies is institutional growth investors, who expect management to deliver growth
at an annual rate of 20% or more. Yet, the silent thief of depletion
works silently and persistently against this objective.
WHAT IS A GROWTH COMPANY?

EnerCom maintains a database containing more than 40 quarters


of comprehensive operating, financial, and statistical data on more
than 200 companies listed on North American, European and
Asian stock markets. We perform analysis and benchmarking for
clients, comparing quarterly annual and basin results against peer
groups. Our hypothesis and conclusions in this paper are supported
by this database and our insight gained from observations and
discussions with executives, field personnel, investors, and analysts
over the previous 22 years.
If growth is the mandate from the investment community to
most independents, then how much growth is enough to qualify
as a growth company? In response to questions from our clients,
we researched the answer using data sourced from EnerComs US
E&P database.
20

1504ogfj_20 20

Figure 1 plots three-year Debt-Adjusted Production Growth per


Share, a metric that compensates nominal production growth for
changes in capital structure, on the x-axis against three-year share
price appreciation on the y-axis. We used the three-year period
ended Dec. 31, 2013 in order to provide a long-term perspective
on growth, and during a time when the market could be considered
relatively efficient having a duration long enough to dampen any
large swings in commodity prices. The analysis includes 23 US
independent E&Ps for which we had complete data. We observed
a strong relationship between debt-adjusted production growth
per share and long-term share price appreciation, as evidenced by
the 0.7741 R-squared value. We removed companies with international operations and those with share price changes that were
driven primarily by company-specific catalysts having little to do
with longer-term operational performance. Had the sample been
expanded to include those companies, the R-squared statistic
would have been 0.1879.
As expected, the market sold off shares of companies that experienced a decline in production, and in general bid-up the shares
of those demonstrating a track record of delivering consistent
growth. Based on our analysis, we estimate that the growth company effect begins to kick-in when annual debt-adjusted production
growth reaches 20% or more.
THE INTENSE THIRST FOR CAPITAL

If the growth company threshold is approximately 20% for debt-adjusted production growth, then the question becomes what is the
financing required to achieve that threshold and what is a companys
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1504ogfj_21 21

3/31/15 3:25 PM

RAISING CAPITAL

For management teams at public companies, the river of capital


they can tap into includes both equity and debt, while private
operators are generally dependent on some form of debt, usually
secured by their proved reserves. Over the past five years, US and
Canadian E&Ps have raised more than $349 billion in capital from
IPOs, secondary equity offerings and debt, as illustrated in Figure
2, which shows the proportion of capital raised by type from 2010
through year-end 2014.
By far, debt has been the most popular type of capital for E&P
companies to raise. There are several good reasons to employ debt
rather than equity, including:
Its non-dilutive to share count and the outflow of cash in the
form of interest payments is deductible;
Reduces the weighted average cost of capital as debt is generally
less expensive than equity;
The holders of the debt capital instrument are senior to the
equity holders and will tend to hold the debt longer; and
Its easier to raise as it provides a steady state flow of cash to the
holders of the note.
Of note is that in 2014, secondary equity offerings surged to 39%
of total capital raised, as compared to the average of 23% in the
previous four years. We anticipate the increase was due to a variety
of factors, including issuing equity for acquisitions and de-leveraging
balance sheets.
CAPITAL STRUCTURE EFFECTS

If debt has been the most popular form of capital to raise, then
how much leverage do independent E&Ps have? Figure 3 plots net
debt to EBITDA for the trailing 12 months ended Sept. 30, 2014
22

1504ogfj_22 22

F4: LEVERAGE AND EQUITY PRICE CHANGES


(11/24/2014 - 12/3/2014)
Large-cap

Avg. change in equity prices

0.00%
5.00%

Mid-cap

Small-cap

5.95%

10.00%

11.78%

12.95%

15.00%
22.32%

20.00%

23.31%

25.00%

31.64%

Above median debt

30.00%

Below median debt

35.00%

F5: E&P SHARE PRICE PERFORMANCE


(PERIODS ENDING 1/30/2015)
10.00%
0.00%
Share price % change

ability to grow production organically?


We tracked the Asset Intensity of 74 E&P companies from
EnerComs US E&P database. Asset Intensity is the percentage of
cash flow required to keep production flat, and we measure it by
dividing the product of production and three-year finding and
development costs by cash flow from operations, on a trailing
12-month (TTM) basis. An Asset Intensity value of less than 100%
implies that a company is generating free cash flow in excess of its
base decline, which can be reinvested back into organic growth.
A value greater than 100% indicates a company is reliant on outside
capital just to hold production on par with current levels.
At Sept. 30, 2014, the average Asset Intensity for the group was
105%, although skewed higher by a few companies, but indicating
that most independents were capable of funding at least a portion
of their capital plans with internally generated cash flow. However,
even though 64 of the 74 companies in our sample posted Asset
Intensity scores less than 100%, they still had to outspend cash
flow to achieve their production growth goals.
For example, of the 74 independents in our analysis, only 13
posted positive FCF for the trailing 12 months ended Sept. 30, 2014.
Simply put, growth company management teams are reliant on
outside capital to fund growth plans and have had to dip into the
river of capital from time to time.

Week

0.5%

0.4%

YTD

6-Months

1.8%

10.00%
20.00%

14.6%

30.00%

34.5%

40.00%
50.00%
60.00%
70.00%

Below median debt


Above median debt

66.5%

from highest, or most leveraged, on the left to least leveraged on


the right for 74 independents in our US E&P universe.
The median Net Debt to EBITDA on a TTM basis as of Sept. 30,
2014 for the companies in the group, denoted by the red horizontal
line, was 2.0x with values ranging from a low of -3.2x to a high of
20.0x.
The gold bars represent those companies operating primarily
in resource plays, such as the Eagle Ford shale play of South Texas,
the Bakken and Three Forks plays of the Williston Basin, the Marcellus and Utica natural gas shale plays, and the Permian Basin of
West Texas. We find that the majority of the resource players have
below-average leverage, largely the result of high-quality assets that
generate strong cash flows, above-average returns, and profitability,
all of which combine to reduce the need for external financing.
ALLOCATING CAPITAL TO GROWTH

If companies are riding on a river of capital driven by commodity


prices, then capital structure plays a role in how high they may sit
in the water. A highly levered company sits lower in the water, at
greater risk and less maneuverable when markets get turbulent. If
a team chooses to put more capital to work by levering-up the
balance sheet to accelerate growth and earnings, then we should
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F6: IRR FOR DRILLING AT THREE PRICE DECKS


60.00%

Aug-2014 ($3.89/MMbtu, $95.57/bbl)


Nov-2014 ($3.81/MMbtu, $74.34/bbl)
Dec-2014 ($3.50/MMbtu, $50.00/bbl)

50.00%
Internal rate of return (IRR)

A key observation is that asset quality


appears to drive capital structure, not
vice-versa.
EQUITY MARKET REACTIONS TO
CAPITAL STRUCTURE

40.00%
30.00%

us

le
rd
rd
an
vil
fo
Fo
mi n
tte
od
er Basi gle
e
o
P
y
M
W
Ea
Fa
Note: Chart assumes no change in drilling costs
e
kk

ell

arc

Ba

et

rn

Ba

8.00%
7.10%
4.50%

8.00%
7.30%
5.20%

12.00%
11.50%
8.60%

24.00%
14.70%
3.90%

29.30%
18.20%
6.10%

10.00%

51.00%
48.90%
40.30%

0.00%

43.40%
11.00%
2.60%

10.00%

19.00%
11.50%
7.60%

20.00%

vil

es

n
ay

le

F7: WELL COST SENSITIVITY


$10,000

Current well cost


20% IRR ($3.81/MMbtu, $74.34/bbl)
20% IRR ($3.50/MMbtu, $50.00/bbl)

$9,000

Well cost (thousands)

$8,000
$7,000
$6,000
$5,000
$4,000
$3,000

us

ell

arc

ian
rm

Pe

gle
Ea

rd

Fo

Fa

t
ye

vil

te

le

d
or

df

oo
W

en

kk

Ba

et

rn

Ba

$9,100
$5,900
$5,211

$3,000
$1,630
$1,423

$9,000
$6,650
$3,020

$4,000
$2,950
$2,570

$2,500
$1,890
$1,595

$7,500
$6,675
$3,617

$0

$69,00
$6,550
$4,105

$1,000

$7,000
$7,000
$7,000

$2,000

vil

es

n
ay

le

expect companies with higher debt levels to post above-average production growth rates.
To test this hypothesis, we analyzed a subset of 74 companies in our US E&P universe
comparing their debt, as measured by Net Debt to EBITDA for the TTM ended September
30, 2014, to year-over-year production growth rates with the Median being 2.0x.
It is telling that the companies with above-median leverage grew production during
the analysis perod, on average, at 25%, as compared to 42% for companies with leverage
below the median. At first, this observation is counter-intuitive, and we recognize that
there may be a chicken and egg effect here, in the sense that several of the above-average
leveraged companies are non-resource players, but not all. The above median group also
includes some companies that have divested assets to reduce debt.
The E&P companies with Net Debt to EBITDA below the 2.0x median include resource
players drilling high-quality assets, including the Bakken/Three Forks shale oil play, the
Marcellus and Utica shale gas plays, the Eagle Ford shale play in South Texas, the horizontal
Niobrara play in the Colorado D-J Basin and the multi-pay, multi-play Permian Basin of
West Texas.
APRIL 2015

1504ogfj_23 23

OIL & GAS FINANCIAL JOURNAL

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The equity markets reaction to companies


with above-median leverage has been definitive. The chart below looks at the average change in equity prices for above and
below median debt E&P companies in
reaction to Saudi Arabias Thanksgiving
Day Surprise decision not to cut production to support world crude oil prices in
2014.
Figure 4 illustrates the average share
declines from Thanksgiving Day to the
market close the following Monday, Dec.
3, 2014.
Shares of independents with leverage
above the median lost more value than
their more lightly levered peers in every
market capitalization group. Figure 5 takes
a more recent, and longer-term view of the
same group. For the six months ended Jan.
30, 2014, the equity prices of E&Ps with
debt to EBITDA greater than the 2.0x median suffered substantially more than those
with below median leverage.
Putting it in perspective, companies
with net debt to EBITDA above the median
of 2.0x experienced share price declines
almost twice as severe as those with below
median debt. In our view, there are several
reasons for the selloff of leveraged
companies:
Greater financial risk, and in some cases, perceived financial distress as cash
flows compressed by weakened commodity prices put the ability to service
debt in doubt;
Growth expectations reduced lower
than those of companies with low, or
no, debt, as interest payments eat into
shrinking discretionary cash flow; and
In the event of a default, less equity
available for distribution to
shareholders.
Make no mistake that companies with
below-average leverage have experienced
a bumpy ride, but they have been able to
navigate more effectively through the rapids of the dynamic commodity price
environment.
23

3/31/15 3:25 PM

F8: MORE DEBT = BIGGER CAPEX CUT


Average =3.2x

%Change CapEx

Debt/EBITDA

6.7x

2015 Capital budget change from 2014E

40%

3.4x
2.3x

20%

0%

2.8x

6.0x
4.0x

Average = 1.7x

2.2x

2.1x 2.1x

1.8x

2.2x

1.1x

2.5x

1.9x
1.1x

20%

40%

37% 37%
41% 41% 39%

33%

28%

22%

9%

E&P equity prices have fallen along with


commodity prices, and so have the economics of drilling in the US. The Figure 6
illustrates the internal rates of return (IRR)
for drilling in eight of Americas known resource plays at three different price decks
(assuming no change do drilling costs).
In August 2014 with the near-month
futures price for WTI at $95.57 per barrel
and natural gas of $3.89 per MMbtu, most
US oil plays generated strong returns above
the costs of capital for most E&P companies. As prices deteriorated into the fall, so
did returns on drilling, as illustrated by the
drop in IRRs at the $74.34 per barrel price
level. At prevailing rates of $50 per barrel,
the economics of drilling in nearly every
resource play in America are stressed below
the prevailing cost of capital.
As previously noted, the industrys response to the realities of the new price
environment and severely deteriorated well
economics has been nothing short of dramatic. Operators moved quickly to stand
down rigs across the North American oil
patch, dropping the Baker Hughes rig count

0.0x
P
2.0x
4.0x
6.0x

51% 50% 49%

CAPITAL ALLOCATION
WELL ECONOMICS

16% 14%

8.0x

80%

1504ogfj_24 24

1.8x 2.0x

2%

60% 57%

24

1.2x

0.9x

Total debt / EBITDA (TTM 9/30/2014)

60%

10.0x

to levels not seen since the third quarter of 2010.


Of course, there are two sides to drilling economics commodity prices and costs. At
prevailing commodity prices and capital expenditure levels, the economics of drilling in
most plays do not merit the allocation of additional capital. So, we analyzed how far drilling
and completion costs must decline to induce operators to stand-up rigs and drill.
Figure 7 illustrates the drilling and completion costs for the same resource plays noted
above required to generate a 20% IRR.
Keen observers will note that the largest drops in required drilling and completion costs
occur in oil plays. Our models estimate that capital costs for drilling and completion have
to fall 41%, 52% and 66% in the Permian Basin, Eagle Ford Shale and Bakken oil shale plays,
respectively. We note that this analysis is based on public company data, represents a
broad range of data points and is not necessarily representative of results for an individual
company or a specific well. In other words, your mileage may vary, depending on how the
data is used and we update this analysis as market conditions change.
CAPITAL STRUCTURED TO ENDURE

When the down cycle comes, an E&P companys capital structure and its ability to endure
the cycle take center stage. One of the unique features of the oil and gas business is that
the value of an E&P companys most important assets oil and gas reserves fluctuate
daily with commodity prices, but the amount of debt on the balance sheet stays the same
and must be repaid in full.
To cope with compressed margins, lower free cash flow and wounded drilling economics,
operators have cut capital spending in 2015 from 2014 levels. Figure 8 illustrates announced
2015 capital budgets compared to estimated 2014 spending levels (either based on guidance
or analyst estimates).
From left to right in Figure 8, companies are ranked by largest capital expenditure decline
to the lowest (growth), as of Sept. 30, 2014 and proforma for material capital raises before
year-end. The impact of leverage is apparent. Companies with announced capital budget
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3/31/15 3:26 PM

F9: IMPACT OF DILUTION EFFECT ON E&P EQUITIES

BORROWING BASE
REDETERMINATIONS

40%

Revolving credit facilities are another capital source, and as spring approaches, CFOs
and bankers alike are thinking about this
years first round of borrowing base redeterminations. On average, 50 E&P companies in EnerComs US E&P database have
drawn down only 24% of their availability.
However, that average masks the fact that
several of companies are close to fully
drawn. Depending on their year-end 2014
reserves report and the lending bank price
deck, they could find themselves in the
difficult position of having to cut capital
spending further, sell their hedge book to
pay down a reduced borrowing base, and/
or renegotiate covenants.

32.68%
28.53%

30%
20%

23%
19.63%

10%

22.44%
18.55%

8%

6.78%

4%

6.88%

0%

2%

3%

3%

-10%
-20%
-30%

20%

6-Day market reaction


% Dilution

cuts greater than 40% have debt to EBITDA ratios of 3.2x on average, as compared to 1.7x
for those E&P companies with announced reductions of less than 40% and in two cases
even a slight uptick in spending.
Even with dramatic reductions in capital expenditures, operators still report they will
grow production in 2015. Wells drilled in 2014 but not yet completed are likely to be placed
on production in the first half of the year, while those wells that produced a partial year
in 2014 will show a full year of production in 2015. Combined, these factors will drive
production increases, although the rate of growth should decline.
We also note that at current oil price levels, it is still profitable to produce in most major
oil plays. The average operating expense and overhead costs for the 87 companies in the
US E&P subset of our database was $22.37 per barrel of oil equivalent at Sept. 30, 2014. Even
at $45 per barrel, most operators are generating positive cash flow from operations.
Lets talk about the decision to allocate capital to drill new wells versus producing wells,
given profitable operations. Calculating the go-forward internal rate of return on an established, producing well (after classifying the initial capital for drilling and completion
as a sunk cost) is quite different, or superior, to that of drilling a new well with flush production. Therefore, producers are not really incentivized to shut-in production from
profitable wells. Rather, they are highly incentivized to keep the values open and invest
capital to enhance or maintain production and improve operational efficiencies, because
companies have G&A burden (overhead), financing burden (interest and principle), and
stock market burden (stock price) to cover.
THE BONDS THAT TIE

Investors are very aware of the new microeconomic realities imposed on E&P companies
by the macroeconomic environment. Not only have equity valuations fallen, but refinancing
debt for many E&Ps has become more expensive.
From 2010 through year-end 2014, the yields on higher-quality bonds have steadily
declined, along with the general trend in interest rates. In the fourth quarter, however,
yields on lower quality paper having an S&P rating of B or CCC, skyrocketed. A sample of
CCC rated bonds issued by independent E&Ps rose to approximately 15% at year-end
2014, up from about 7.0% only two months previous.
The river of capital continues to flow, and we note that approximately $3.4 billion of
corporate bonds for independents reach maturity during 2015, and lower quality credits
may find refinancing substantially more expensive in todays market than they may have
anticipated.
26

1504ogfj_26 26

THE STRONG GET STRONGER


TAPPING THE EQUITY MARKETS

Although we cannot avoid covering some


of the negative impacts of the current down
cycle, there is some sunlight shining
through the storm clouds. Several independents recently have tapped equity markets
to shore-up their balance sheets and
strengthen their competitive positions, and
found a warm reception from investors.
We evaluated eight secondary equity
deals that collectively raised $3.95 billion
of fresh capital for their issuers. All of the
announcements indicated that among
other uses, the proceeds would be used to
pay down outstanding indebtedness. In
addition, several of the new equity issuers
mentioned they planned to use their revitalized financial strength to take advantage
of the current cycle and consider acquisition opportunities.
Ordinarily, we would expect an equity
offering announcement to result in a reduction in share price, to account for the
dilution of ownership resulting from the
additional shares, at least in the short run.
Apparently, these are not ordinary times,
as we did not observe share price declines
in proportion to the dilution impact, and
in a few cases we observed the opposite.
Figure 9 compares the six-day equity
price change for the independents in our
analysis to the dilution percentage, as measured by the number of new shares divided
by existing shares outstanding at Sept. 30,

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2014. As a rule of thumb we use a six-day period covering the three


days before and after an announcement, to measure the impact
of news on a companys share price. This duration helps us control
for market trends outside the control of management, such as
commodity prices and other noise, and events occurring outside
the impact period. The companies are ranked left to right by positive
to negative share price change.
The average equity dilution for the secondary offerings we analyzed was 19%, ranging from a low of 6.8% to a high of 33%.
Somewhat counter-intuitively, the average six-day equity market
reaction to the equity raises was a positive 1%, ranging from a high
of positive 23% to a low of negative 20%.
For those companies perceived to have strong operations, expansion opportunities and good operational performance, investors
appeared to view the new equity capital as a catalyst for getting
stronger.
It is important to note that nothing in our business is static.
Since we last looked at the equity issuers in early March, the shares
of all E&P companies have declined along with further commodity
price weakness. The change in share prices illustrates the impact
of further declines in commodity prices since the equity offerings
were closed. If we needed any reminder, no matter how good a
management team or its assets, the prices of oil and gas company
stocks rise and fall on the global tide of commodity prices.
NEARING THE BOTTOM?

There may be several reasons for the market not selling off the
shares of companies raising equity in the current environment to
several factors, including:
At this point in the cycle, those investors who wanted to trim
or eliminate their exposure to oil and gas names have already done
so. In other words, the panic and fear money is gone.
Short sellers have made their money, and after a 50%+ decline
in oil and gas valuations, they may have less interest in betting on
additional weakness.
Bargain hunters abound. As we reported at EnerComs conference in San Francisco in February, 76% of respondents to our survey
of the West Coast buy-side indicated they were in bargain hunting
mode, looking for opportunities to stock-up on their favorite names
at discount prices, providing willing buyers to those looking to
rotate out of the sector.
Combined, the above factors may have helped to create support
for oil stocks before the most recent dip in oil prices this month,
and no one minimizes the potential for commodity prices to go
lower before they go higher. However, we do note a split on broad
investor sentiment on the future direction of oil and gas prices.
For example, respondents to our West Coast buy-side survey
conducted in February 2015 were nearly evenly divided on oil
prices. 52% of respondents expected oil prices to rebound to the
$70 to $85 per barrel range and 43% expected continued trading
in the $40 to $50 per barrel range. Only 5% believed prices would
fall from prevailing levels. It bears mentioning that no one anticipated a return to $100 oil in the next 12 months.
With 95% of the market believing oil prices are at or near a
APRIL 2015

1504ogfj_27 27

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Since 2008, a river of capital has flowed into the upstream


sector of the North American oil and gas industry. One large
boulder that fell into this metaphorical river, however, was
OPECs 2014 Thanksgiving Day Turkey Surprise in which
swing producer Saudi Arabia decided against cutting
crude production, even symbolically, to defend oil prices.

bottom, oil and gas equity investors decided now was the time to
put more equity into their favorite names. We anticipate more
companies will consider tapping the equity river of capital in 2015.
OIL AND GAS IS (STILL) A SUNRISE INDUSTRY

When the sea changes, investors want a steady hand on the helm
of the corporate ship. Those teams with experience managing through
the cycles have an edge, a portfolio of high-quality assets certainly
helps make things easier and a conservative capital structure helps
improve a teams ability to navigate turbulent markets. Over the past
14 quarters, public E&Ps have raised more than $100 billion in new
equity and debt capital, and if past is prologue, the best future performers will be those who have been able to manage the capital cycle
to generate profitable growth and strategic advantage.
We are mindful that within every cycle are planted the seeds of
its own destruction. Although the down cycle initiated by the Saudi
grab for market share has brought with it much upheaval to much
of the rest of the worlds oil producing nations, including America,
we note that the longer term trends appear to be working towards
a rebalancing of supply and demand in the future.
As middle classes in developing nations grow and prosper, we
anticipate that they will want to live a more energy-intensive
lifestyle, which includes central air conditioning, maybe central
heating too, and they will want a diet consisting of more protein
and drive or use more public transportation. Simply put, a growing
number of humanity will be living more materially prosperous and
healthier lifestyles that necessarily consume more energy, and oil
and natural gas are simply the most cost-efficient energy sources
to deliver on that need.
In our view, oil and gas remains a sunrise industry, and this
cycle, too, shall pass like all the others. The market will eventually
find its equilibrium, and the river of capital will continue to flow
into and through this current down cycle. Those management
teams able to adapt to changing circumstances and wisely conserve,
raise, allocate, and generate capital are those most likely to profit
from the current down cycle and see the dawn of the next up cycle
sooner than others.
ABOUT THE AUTHOR

James Constas, managing director at EnerCom Inc.,


has more than 23 years of professional experience,
primarily in oil and gas, in consulting, management,
marketing, finance, economics and investor relations.
He received his BS in International Management from
Arizona State University and an MBA in Finance from
the University of Denver. He is a member of the National Association
of Petroleum Investment Analysts.
27

3/31/15 3:26 PM

Outlook for offshore energy


SHORT-TERM DIP, LONG-TERM RISE

RICHARD BRAKENHOFF, RABOBANK, UTRECHT, THE NETHERLANDS

SINCE JULY 2014 the crude oil price has more or less halved.

As a consequence, we expect the oil and gas industry to cut its


upstream CAPEX budgets by an estimated 21% to US$538 billion
in 2015 compared with the record high of US$679 billion in
2014.
Companies offering their services and products to the oil
and gas industry the oil services sector are facing less demand from operators on the one hand and increased capacity
by their own sector on the other, resulting in deteriorating
market conditions.
Taking into account higher unconventional oil production
in North America in 2015 and surplus capacity by the OPEC
countries, we believe that the Brent oil price will be around
US$50 per barrel in both 2015 and 2016. However, lower CAPEX
spending, particularly in North America, will result in lower oil
production as of 2016 2017. At the same time, the worldwide
demand for oil and gas will increase structurally. As a result, we
expect that oil prices will gradually recover to US$95 in 2020,
leading to higher CAPEX spending again. The latter is necessary
to raise oil and gas production in the relatively more expensive
(deepwater) offshore fields. The increasing importance of offshore oil and gas production in combination with recently
announced cost saving measures will result in our view in a
recovery of the oil services market as of 2018.
NEW FIELDS NEEDED TO MEET DEMAND

According to the International Energy Agencys World Energy


Outlook 2040, global demand for oil and gas will increase by a
CAGR of 0.5% and 1.6%, respectively, over the period 2012-2040.
In absolute numbers, oil and gas consumption will go up by
14% and 55%, respectively.
Regarding oil, the forecasted increase seems low, but we have
to take into account the depletion of existing producing oil
fields. The IEA uses 4% as an average depletion rate, i.e. the oil
production of an existing field goes down by 4% every year. To
put this number in perspective, global oil production was about
91 million barrels per day (b/p/d) in 2014. The IEA expects a
demand of 102 million bpd in 2040, of which 29 million bpd
would come from existing fields, and 73 million b/p/d from
new fields.
Regarding unconventional oil production in North America,
the depletion rate is not 4% per annum, but on average 85%
in the first two years. As a result, drilling of new wells in North
America has to remain high just to maintain production
levels.
OIL PRICES UNDER PRESSURE IN 2015 AND 2016

Although the Brent oil price recently has recovered to US$60,


28

1504ogfj_28 28

we expect, on average, an oil price of US$50 in both 2015 and


2016. The main reason is the unconventional oil production
growth in North America (2015: +0.7 million bpd), which nearly
equals the predicted rise of global consumption. In addition,
the OPEC countries do have spare production capacity. Furthermore, several countries, notably Libya and Iran, produce
significantly less than their normal production levels due to
civil unrest and sanctions.
With current high oil stock levels, we believe the chance of oversupply in the short term is higher than the chance of undersupply.
However, we believe that lower CAPEX spending by the oil and gas
industry in the short term, particularly in North America, will lead
to pressure on production rates in the longer term. With rising demand for oil in the coming years, pressure on production in our view
will lead to a recovery of the oil price as of 2017 onwards.
CAPEX DOWN BY AN ESTIMATED 21% IN 2015

Between 2000 and 2013 the global oil & gas industrys CAPEX
increased by a CAGR of 14.8%. According to Barclays, CAPEX
rose to a new record of US$679 billion in 2014. CAPEX increased
strongly due to (i) growth of global oil and gas consumption,
(ii) underinvestments in the 1990s, (iii) an increasing shift from
onshore to offshore production, which is relatively more expensive, and (iv) cost inflation. The latter was caused by a shortage
of staff and equipment, but also due to increased local content
requirements.
In early 2014, the oil majors (ExxonMobil, Shell, BP, Chevron,
ConocoPhillips, Total, and ENI) already announced CAPEX
budget cuts for 2014. The fall of the oil price since July 2014 has
also forced other oil and gas companies to cut their CAPEX
budgets for 2015. Particularly unconventional oil and gas producing companies in North America have announced CAPEX
budget cuts of tens of percentage points. Furthermore, the oil
majors stepped up their budget cuts even further.
To sum up, we expect the oil and gas industry will lower its
CAPEX spending by 21% to US$538 billion in 2015, followed by
a further drop of 5% in 2016. As a result, oil production growth
will be limited or even become negative in 2017, tightening the
supply/demand balance and leading to the recovery of the oil
price. Therefore, the oil and gas industry will raise its upstream
CAPEX budgets again as of 2017, leading to a new record high
in 2020.
OFFSHORE PRODUCTION GROWTH
EXCEEDS INCREASE OF ONSHORE

Oil and gas production at offshore oil and gas fields has existed
for many decades. However, in the last two decades technological
progress has been huge, leading to the possibility to explore oil
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ABOUT THE AUTHOR

Richard Brakenhoff has worked as an industry analyst at Rabobank in Utrecht, The Netherlands, since 2007. He covers the
oil & gas, dredging, and transport sectors. Prior, Brakenhoff
spent 17 years as an equity analyst at several banks covering
the same industries. He studied business economics at the VU
(Free University) in Amsterdam.
F1: OIL PRICE UNDER PRESSURE IN 2015 AND 2016,
FOLLOWED BY RECOVERY
160
140
120
Oil price

and gas fields at water depths of up to 3 kilometers


(about 1.9 miles) compared to only 1 kilometer
(about 0.62 miles) 20 years ago. This trend will
continue.
Whereas offshore oil and gas production accounted for 20% of the worlds total production in
1980, it rose to 30% in 2014. Taking into account
that the majority of oil and gas field discoveries
were made offshore in the last decade, particularly
in (ultra-) deepwater (Brazil), we expect that offshore oil and gas production growth will continue
to exceed the increase of onshore production assuming that our oil price scenario will become
reality. However, the break-even oil price to produce
oil profitable is considerably higher at offshore
fields compared with onshore, meaning that an
ongoing low or even lower oil price would distort
this picture of structural growth.

100
80
60
40
20

OIL SERVICES MARKET EXPECTED


TO RECOVER AS OF 2018 ONWARD

13

15E 16E 17E 18E 19E 20E 21E 22E 23E 24E 25E
Year
IEA base case
Rabobank

14

Source: IEA World Energy Outlook 2014, Rabobank CCN IKT

800

140

750

120

CAPEX

700

100

650
80

600

60

550
500

Oil price

F2: UPSTREAM CAPEX EXPECTED TO STRONGLY RECOVER AS OF 2018

13

14E
IEA

15E

16E

Rabobank

17E
Year

18E

19E

20E

40

Oil price (Rabobank; RHS)

Source: IEA , Rabobank CCN IKT

F3: OIL SERVICES MARKET EXPECTED TO RECOVER AS OF 2018


130

Strong market conditions

120
110
Index

100
90
80
70

Difficult market conditions


96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14E
15E
16E
17E
18E
19E
20E

Following more than a decade of strong growth (CAGR:


13%), the global oil services market has deteriorated
as of mid-2014. Thanks to favorable order backlogs at
year-end 2013, the sectors overall EBITDA and net
profit before exceptionals increased in 2014 compared
with 2013. However, the mentioned CAPEX budget
cuts by the oil and gas industry already resulted in a
lower order intake in 2014, leading to lower order backlogs at year-end 2014 compared with one year ago.
Besides lower demand for oil services, available capacity
(drilling rigs, installation vessels, transport vessels, etc.)
climbed by 30-40% between 2008 and 2014, distorting
the supply/demand balance even further.
Also in 2015, a substantial amount of new equipment will enter the market. To adjust their organizations to the deteriorated market conditions,
the oil services companies took one-off charges of
more than US$15 billion in 2014 for (i) the write-off
of goodwill and other assets (such as vessels, drilling
rigs, etc.) and (ii) the layoff of staff. This US$15
billion represented more than 50% of the oil services
sectors net profit realized in 2013.
In comparison with the previous dip (2008/09),
this amount is huge (2008: US$2 billion), clearly
illustrating that this market dip is different. As of
2018, we are positive on the outlook for the oil
services market thanks to (i) the oil price recovery,
(ii) increased upstream CAPEX spending by the oil
and gas industry, (iii) growth offshore oil and gas
production, (iv) rise offshore wind, and (v) the impact of the recently announced organizational
adjustments.

Year
Oil services market

Average

Source: Rabobank CCN IKT


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Dylons | Dreamstime.com

Financing offshore assets


MARKET CONDITIONS TODAY CONTRAST SHARPLY FROM THOSE OF JUST A FEW MONTHS AGO
MARTIN TOULOUSE AND PETER GLENN, BAKER BOTTS LLP, NEW YORK, NY

SPONSORS LOOKING TO FINANCE ASSETS such as drill-

ships, traditional rigs, spars, floating production semi-submersibles, or other offshore exploration and production
installations destined for operations in the Gulf of Mexico
face a starkly different environment today than even just a
few months ago. In particular, the risk/reward profile of these
assets presents a unique suite of considerations for both
owners and potential financiers.
Offshore exploration and production is typically more
expensive and riskier than onshore projects, especially given
the shift towards deep and ultra-deepwater exploration,
which influences the financing terms available to sponsors.
In 2013 and the beginning of 2014, we saw energy companies
committing more and more resources to E&P projects as oil
and natural gas prices were experiencing sustained highs,
spurring increased orders for offshore installations to sustain
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1504ogfj_30 30

the forecasted boom.


Challenges began to emerge as oil prices peaked in the
summer of 2014 before beginning a serious slide to less than
half of the top prices by the end of the year, and it is not clear
when the current price pressures will be alleviated. The effects of the current market conditions may rule out certain
options to finance offshore assets, but there remain a number
of possibilities for owners looking to complete deals in 2015
and beyond.
Traditionally, there have been a number of methods to
finance offshore assets available to their owners. Many of
the larger and stronger companies simply chose to finance
their entire fleet on-balance sheet. With the right mix of
assets, contract backlog, and contract tenor, such companies
were able use conventional corporate bank financings, debt
capital markets, and in some cases, favorable term loan B
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structures to finance their operations and the development


of new assets.
Drillships, FPSOs, and other offshore assets have also long
been financed on a stand-alone basis using special purpose
vehicles. In many parts of the world, long-term contracts
and charters for drillships, FPSOs, and similar assets make
them particularly suitable for vessel financing arrangements
provided by commercial bank lenders. Relying in large part
on the creditworthiness of the charterer, lenders will fund
the construction, development, and operation of the
vessel.
Depending on the sourcing of materials used in the project,
export credit agencies may be in a position to finance a por tion of the project as well. However, many such vessels operating in the Gulf of Mexico rely upon short-term contracts,
which can complicate financing efforts for owners looking
to operate in that region.
In addition to commercial banks, the debt capital markets and institutional private placement market have been
tapped to finance individual offshore units. Brazil has seen
the most activity in that respect. For example, in May 2013,
Odebrecht Offshore Drilling Finance Limited successfully
sold approximately $1.8 billion in project bonds, rated Baa3,
with a roughly nine-year maturity in a Regulation 144A/S
offering, secured by mortgages over two drillships and a
semi-submersible rig, and the revenues generated by each
vessels respective long-term charter.
Each drillship was under charter for 10 years, and the rig
was under charter for seven years, which terminated four
years prior to the maturity of the bonds, and all were in
operation off the coast of Brazil. However, to partially cover
the re-contracting risk created by the gap between the termination of charters and maturity of the debt, the bonds
featured two cash sweeps: the first beginning as early as 12
months prior to the termination of each charter and the
second beginning three years and 10 months prior to
maturity.
More recently, a subsidiary of SBM Offshore NV completed a $450 million offering of seven-year senior secured
notes in an institutional private placement to support its
natural gas production center located in the Deep Panuke
field off the coast of Nova Scotia, Canada. The project operates under a charter-party contract with Encana for an initial
term of eight years. Fitch assigned a BBB- rating to the bonds,
citing the charters achievable performance requirements,
the pass-through of all operational costs to Encana, and the
lack of exposure to resource risk.
Bonds can provide a welcome diversification of financing
sources to project owners, but to the extent issued in reliance
on a single charter party, may be subject to a ratings downgrade and associated consequences in the case of an unexpected deterioration of the counterpartys credit quality,
especially when decreased demand globally makes it more
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The market outlook is not all bleak as the current pressure for offshore units is partially offset
by a number of factors. The existing fleet is aging and there will be a need to replace obsolete
equipment in the coming years. The technological requirements of some of the newer plays in
ultra-deep waters will require either newbuilds
or refurbishment of existing assets. A significant
unknown is the level of demand from the newly
opened Mexican regions of the Gulf of Mexico,
all of which could act to partially counteract the
market demand drag and oversupply.

ties encountered by the OSX group of companies in Brazil


led to restructuring negotiations with holders of $500 million
in project bonds issued to finance the construction of an
FPSO vessel destined for operations in the Campos Basin.
Similarly, some of the bonds issued to finance FPSOs chartered to Petrobras were subject to recent ratings
downgrades.
While traditional vessel financing structures, whether in
the bank or bond markets, are often based on long-term
charter arrangements that entail fixed lease payments from
strong counterparties, lenders may be willing to assume
some resource risk in certain circumstances. To the extent
the revenues to be received by the owner of an offshore unit
being financed are subject to volume, price, or development
risk with respect to the associated resources, the lenders
credit analysis becomes more complicated. Lenders must
consider more than the counterpartys credit quality and the
terms of the charter, and must assess whether market forces,
operational conditions, or other risks could result in a curtailment of production or otherwise affect revenues.
However, with proper structuring and combining traditional vessel financing with project finance and reserve-based
lending skills, innovative financing arrangements that incorporate some resource risk can be workable so long as the
projected cash flows are sufficient to support the debt. Structures of this type alleviate the need to secure a long-term
charter arrangement from an investment grade counterparty
and, therefore, can present an interesting option for sponsors
wishing to finance individual assets on a standalone basis.
CURRENT MARKET CONDITIONS

The drop in oil and natural gas prices has not only affected
projects under way, but has reverberated across the sector
in a wider fashion. E&P companies have announced decreased exploration budgets as the incentive to drill new
wells and explore new fields has diminished. As a result,
new orders can be expected to decline to some extent or be
delayed. Further exacerbating these issues is the oversupply
of many offshore assets, particularly in certain segments.
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3/31/15 3:26 PM

The decrease in commodity prices has deeply


affected the energy sector and the tools energy
companies possess to acquire the capital required
to proceed with their desired projects. In the short
and medium term, many projects are expected
to be delayed or cancelled. However, despite the
current market prices and supply concerns with
respect to offshore units, many remain optimistic
about the long-term prospects for development
in the Gulf of Mexico, and capital should remain
available to sound projects and companies even
during the downturn.

While energy prices were high, there was a rush to construct newbuild vessels, platforms, and rigs to service all of
the fields projected to come online in the coming years. But,
as of the end of February 2015, IHS estimated the percentage
of jackups, semi-submersibles, and drillships under contract
in the Gulf of Mexico at 79%, down from 95.53% last year at
the same time. This has put pressure on day rates as price
competition has set in and dampened the prospects of recontracting assets as they roll off previous charters. According to various industry sources, day rates have started to
decrease, in some cases materially, with more rigs and drillships set to come into the market over the next 12 to 18
months.
In the Gulf of Mexico, pricing pressures are expected to
be particularly significant with respect to jackups, given the
large number of uncontracted newbuild jackups scheduled
for delivery in the near future. In the circumstances, if the
price environment continues to be challenging, it would not
be surprising to see some older units being cold-stacked or
scrapped earlier than originally anticipated.
However, the market outlook is not all bleak as the
current pressure for offshore units is at least partially offset
by a number of factors. The existing fleet is aging and there
will be a need to replace obsolete equipment in the coming
years. The technological requirements of some of the newer
plays in ultra-deep waters will require either newbuilds or
refurbishment of existing assets. And a significant unknown
is the level of demand that could result from the newly opened
Mexican regions of the Gulf of Mexico, all of which could act
to partially counteract the market demand drag and
oversupply.
Given the current uncertainty in the market, what options
remain for companies wishing to finance their offshore
projects? Stronger companies will no doubt continue accessing the conventional bank and capital markets to obtain
necessary capital, though potentially on less favorable terms.
But for the smaller owners of offshore assets, access to credit
could be more challenging, at least in the short run.
A particular companys ability to get financing will depend
32

1504ogfj_32 32

in part on the nature and age of its fleet, its geographic focus,
and overall contract backlog. With respect to individual assets, the availability of a longer-term charter arrangement
with a strong counterparty will continue to be a key factor
in determining whether standalone financing can be
considered.
While access to traditional financing sources may be more
challenging for some industry participants, a notable development in the recent past has been the amount of capital
raised by alternative investors to focus on the energy industry.
Private equity firms such as Blackstone, KKR, and Apollo
created funds to acquire assets and make investments in
companies operating across the energy value chain and are
actively looking for opportunities to deploy capital. Most
recently, Blackstone announced the closing of its second
energy-focused private equity fund, with total commitments
of $4.5 billion.
Energy funds and other alternative financing sources may
be willing to provide additional capital to asset owners to
refinance upcoming maturities, bridge current capital needs
or help develop individual systems. In addition, as was seen
in recent transactions consummated onshore, hedge funds
and private equity funds may be willing to provide financing
for E&P activities through working interest or royalty interest
investments, such as overriding royalty interests or volumetric production payments. Such additional financing could
in turn help support the construction and financing of related
offshore production infrastructure.
The decrease in commodity prices has deeply affected the
energy sector and the tools energy companies possess to
acquire the capital required to proceed with their desired
projects. In the short and medium term, many projects are
expected to be delayed or cancelled. However, despite the
current market prices and supply concerns with respect to
offshore units, many remain optimistic about the long-term
prospects for development in the Gulf of Mexico, and capital
should remain available to sound projects and companies
even during the downturn.
ABOUT THE AUTHORS

Martin Toulouse is a partner in the Baker Botts


New York office. He represents financial institutions
and corporations in all areas of private finance,
with a particular emphasis on complex acquisition,
project and other structured financing transactions
in the energy and infrastructure sectors. A significant portion of his practice includes cross-border
transactions.
Peter Glenn an associate in the Global Projects
Practice at Baker Botts where he focuses on the
development and finance of infrastructure projects,
both in the United States and internationally.
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Improving offshore operations


ITS TIME TO LEVERAGE TECHNOLOGY TO CHANGE THE DYNAMIC
BETWEEN SAFETY AND PRODUCTIVITY
MIKE NEILL, PETROTECHNICS USA INC., HOUSTON

LOW OIL PRICES, cost cutting, staff reductions, increasing

stakeholder expectations, and regulatory pressure all are


common threads weaving through todays dynamic global
oil and gas industry. Even with depressed oil prices and
reduced drilling capacity, North American crude oil production is expected to increase through 2015. Bullish fever in
the Gulf of Mexico is attributed to technology advances that
are expected to open exploration into even deeper
waters.
To remain competitive, companies are taking a hard look
at how they can better manage their operations. What seems
to be emerging is that improved ways of managing risk is
paramount. In its Operational Risk Management report,
industry research analyst Aberdeen Group cited gaining
visibility into and control over risk as one of the top priorities of industry leaders today. Best-in-class organizations
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accept that by proactively managing risk they can improve


their production efficiency and reduce costs, which is where
they can save in today s challenging business
environment.
Technology solutions enable efficiencies and change the
game for both onshore and offshore producers. One of the
challenges operators face is leveraging value from the operational data and experience they already have collected
albeit spread inconsistently across multiple business
functions. They then need to fill the gaps in their understanding about the real state of operations. Organizations
are often constrained by the tools and practices they can
use to extract practical insight and decision support. Lacking the means to translate data into useful information
limits the ability for organizations to use risk as an indicator
to suppor t improved , proactive op erational
33

3/31/15 3:26 PM

decision-making.
Leveraging technology to support operational risk management initiatives offers cost-saving opportunities. Bestin-class companies that leverage technology platforms to
manage safety and operations performance are reported to
have 8% less unscheduled asset downtime (over those who
dont), 8% fewer regulation citations, experience a 13% reduction in compliance-related costs, and realize operating
margins 2% or greater than targeted in the corporate plan.
Indeed, theres big opportunity and big value for operators
to reduce risk and improve the productivity of their operations, but to achieve this, they need to do things
differently.
AGING, GRACEFULLY OR DISGRACEFULLY?

As we have seen in mature basin areas in other parts of the


world, aging assets introduce a new dimension of risk and
impact production. It has been 30 years since we began
producing from deepwater in the GoM (>1,000 feet). Many
facilities are showing their age, and as such, the challenges
will continue to increase for operators to sustain safe and
efficient production. Recent incidents have done little to
offset these concerns or reduce the level of public
scrutiny.
Aging assets expose increased process safety concerns,
and new operations are moving into increasingly hazardous,
higher risk environments deeper waters, higher pressures,
and temperatures, more extreme climates, and more remote
locations. In these circumstances, it is crucial to understand
the status of our protective barriers in the context of daily
operations if we are to properly manage the associated
operational risk.
Process safety principles teach us the importance of
designing, building, maintaining, and operating our plants
to avoid major accidents. The approach is simple enough
that by building multiple layers of protection, such that if
one should fail, another will hold, thus avoiding an incident
or preventing it from escalating. Accidents resulting in major
losses typically occur following the failure of a number of
systems or barriers within the process safety management
system all occurring at the same time.
The challenge we face is understanding the impact that
can result from the status of our layers of protection, deviations from performance standards in the risk control systems
for those layers of protection, and simultaneous operational
activities occurring around those layers of protection. It is
among the decisions that lead to those interactions that
deeper insight and practical support are needed if we are
to manage and mitigate operational risk.
Process safety management systems, regulations, and
guidelines, including SEMS II, have begun to define standards
to mitigate and manage risk, yet there are still unplanned
shutdowns, maintenance backlogs, and asset integrity issues
associated with poor process safety performance.
34

1504ogfj_34 34

Best-in-class companies that leverage technology platforms to manage safety and operations performance are reported to have 8% less
unscheduled asset downtime (over those who
dont), 8% fewer regulation citations, experience
a 13% reduction in compliance-related costs, and
realize operating margins 2% or greater than targeted in the corporate plan.

It was reported by Marsh and IChemE, at the end of 2013,


the property damage cost of poor hydrocarbon process
safety topped $34 billion, not including loss of production.
This is a sobering reminder of the financial impact associated with process safety related events. Over the years, while
we as an industry have improved in the number of incidents,
the greatest loss in terms of value has occurred over the
past 15 years.
It is interesting to look at the North Sea, a more mature
basin area than the Deepwater GoM but similarly facing
increasing regulatory challenges.
A COMMON CURRENCY OF RISK

Todays business environment forces operators to be cautious about operations, prudently rationalizing costs without
compromising safety. Many organizations find it difficult
to decide how to focus operations to achieve the best shortterm and long-term results.
Various functional roles within organizations, including
operations, maintenance, engineering, EHS, well services,
and so on, understandably assert their own functional priorities in order to secure scarce resources (ranging from
budget to offshore bed space) in order to meet internal KPIs.
This siloed approach leads to tensions between departments as different practices and business processes emerge
to support individual competing interests. It can also hamper
clarity around the true state of assets leading to problems
prioritizing operational activities.
Operators are beginning to employ technology solutions
to evaluate barrier impairments and operational activities
using a common currency of risk. In this way, the impact

F1: OPERATIONAL RISK MANAGEMENT


Best in Class companies have:
8%
11%

Less unscheduled asset downtime


Higher Overall Equipment Efficiency (OEE) rates

13%

Decrease in compliance-related costs in the past two years

+2%

Higher operating margin vs. corporate plan

8%

Decrease in the number of regulation citations

As compared to all others.


Source: Aberdeen Group 2014

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of each business functions activities is understood in the


context of daily operations. In addition, the interaction
between those activities is captured and consistently shared
across the organization.
Decisions on operational and maintenance priority can
no longer be based on whos shouting the loudest among
the various functional business units. Operators need to
access tangible indicators and potential risk profiles that
clearly identify the cumulative risk to daily operations that
could impact the activity plan. By taking all management
and risk control systems into consideration, operators can
holistically understand, prioritize, and manage business
priorities and optimize work execution.

F2: THE PATH TO OPERATIONAL EXCELLENCE

CHANGING THE SAFETY-PRODUCTIVITY DYNAMIC

Michael Porter from the Harvard Business School emphasizes, A company must continually improve its operational
effectiveness and actively try to shift the productivity
frontier.
Operators continually juggle productivity and safety factors, typically one at the expense of the other. While most
operators err on the side of caution, decisions on prioritization are inadvertently made without fully understanding

Operational risk management

Operational effectiveness & efficiency

Asset productivity

the consequences. Process safety risks may not be so apparent if knowledge and understanding of deviations are
not shared or if the existence of an impaired barrier is not
identified. Despite the bias of a safe, cautious approach and
because there are a number of safety critical systems to
manage, it is often considered reasonable to assume that
such systems are in good working condition, unless one
hears otherwise. As a result, organizations can be caught
in the traditional safety-productivity dynamic, driving-up
inefficiency as well as operational risk.
Recent regulatory changes from BSEE, in the form of
SEMS II, have been designed to help organizations better
manage the dynamic between safety and productivity, to
improve offshore workplace safety and reduce the frequency

Dr. Nansen G. Saleri, President & CEO

QRI knows Mexico.


Addressing high-risk, structurally complex reservoirs in Mexico is
not for the faint of heart. Thats where we come in. QRI reservoir
engineers arent afraid to take on the toughest problems. Our
global experience spans more than 75% of the worlds largest
elds, covering all types of geological and producing conditions.
We deliver superior reservoir engineering:
Investment opportunity assessments
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Analyses of assets for arbitration
Reserves representation for underlying credit evaluation

Any Reservoir. Anywhere in the World.

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and severity of accidents. In addition, regulatory and government sanctions have made getting the dynamic wrong
that much more critical.
Using a common currency of risk, productivity and safety
demands can move from being antagonistic to complimentary forces that enable safely optimizing operations. When
operators have a better understanding of their operational
risk, including how people, processes, assets, the environment, reputation, health, and major hazard risk come together, they are able to see the consequence of their decisions, recalibrate if necessary, and accomplish more of the
right things, at the right time, in the right way. In this way,
they can safely and cost effectively extract the maximum
value from an asset and optimize its performance.
By developing a common currency of risk through sophisticated technology frameworks, where activities and
priorities are measurable in the context of daily operations,
no longer is there a battle between risk management and
operations productivity. When the two are harnessed together, safety no longer needs to be set against production.
When more work can be done safely and efficiently and
when we can measure and report on how safely and efficiency work was carried out can we go so far as to say
weve reached operations excellence nirvana?
THE PATH TOWARDS OPERATIONAL EXCELLENCE

In a time of falling oil price and cost cutting, looking for


operational excellence may be seen as a luxury. But arguably
in such economic straits, striving for operational excellence
is of even greater importance. If operational excellence is
to be more than lip service or a time-consuming initiative,
it has to connect factors that contribute to increased operational risk and production inefficiency.
If an operational excellence program has a chance of
yielding results, it must be based on a clear understanding
of operational risk and the ability to manage that risk. Technology that delivers a common currency of risk by connecting process safety to daily operations can form the basis for
a consistent enterprise operational excellence management
framework. With such a framework, both offshore and onshore operator executives, leaders, and plant supervisors
can:
Rely on a common currency of risk to connect layers of
protection from deviations to daily operations by managing
enterprise-wide risk; a company can develop a unified picture
of performance in the context of daily operations. This
improves a decision-makers ability to manage the potential
for risk.
Manage decisions on operational priority with an understanding of the cumulative impact of operational risk on
daily operations; Operators can make better decisions
throughout the planning-to-execution process. Leadership
can help cross-functional teams better prioritize what needs
to be addressed to ensure safe, efficient and sustainable
36

1504ogfj_36 36

Best-in-class companies that leverage technology platforms to manage safety and operations performance are reported to have 8% less
unscheduled asset downtime (over those who
dont), 8% fewer regulation citations, experience
a 13% reduction in compliance-related costs, and
realize operating margins 2% or greater than targeted in the corporate plan.

operations and better enable the planners to sequence the


two-week activity schedule.
Ensure understanding and visibility of operational decisions
throughout the planning-to-execution business process.
Increased visibility into complex operations at every stage
of the planning-to-execution process, whether prioritizing
work, optimizing the schedule or executing the plan, enables
operators to manage their operational performance. By
giving Operations the appropriate tools to understand the
risk impact of their decisions, they can better sequence and
schedule activities in their two-week plans and get more of
the right things done safely.
Theres big opportunity and big value to the tune of
billions of dollars in enterprise-wide operations excellence.
In order to compete in todays very dynamic business environment, offshore operators need to do things differently.
They need to manage their operational risk in a way that
drives safe production efficiency in order to survive.
We started with risk and finished with operational excellence. The two are essentially connected; technology is the
means to make the former useful and the latter
achievable.
Comprehensive management solutions employing sophisticated operations excellence frameworks are available
to help operators reduce their risk and improve the productivity of their operations, mitigate hazards to humans and
the environment, improve plant profitability, reduce unplanned downtime in addition to operations and maintenance costs.
Its time to leverage technology to improve offshore operations. Its time to change the dynamic between safety
and productivity.
ABOUT THE AUTHOR

Mike Neill is president of Petrotechnics North


America. With his background in upstream operations working for BP and throughout his
career at Petrotechnics, he has helped improve
safety and performance management for oil and
gas organizations around the world for more
than 30 years. Neill is a member of the CCPS, AIChE, GPA,
ASSE, and is an active member of the Mary Kay OConnor
Process Safety Center steering committee.
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OIL & GAS FINANCIAL JOURNAL

APRIL 2015

3/31/15 3:26 PM

Drastic industry changes


AS COMPLEXITY GROWS, OIL AND GAS COMPANIES MUST FOCUS ON CAPABILITIES AND FLEXIBILITY
VIREN DOSHI, STRATEGY&, A PWC-OWNED UNIT

OIL AND GAS COMPANIESand particularly those with large

upstream operationshave always been better at managing dayto-day operational uncertainty than firms in other industries.
However, even by those standards, the industry now faces a series
of profound structural changes that will create a dramatically more
complex environment for the foreseeable future. Upstream companies must operate across a wide range of exploration and production environments, leading to more diverse operations and
greater complexity. The recent decline in oil prices complicates
this challenge, yet that is a medium-term factor. The more persistent
issue is high volatility in oil prices, which increases the level of
planning uncertainty and is only likely to get worse in the future.
In this environment, the strategic responses that may have
worked for upstream companies in the past are no longer relevant.
Instead, companies need to identify and focus on a small number
of differentiating capabilities, and then reshape their portfolio and
investment decisions accordingly. Perhaps most critically, this
strategy must remain flexible enough to adapt to changes in the
operating environment.
GROWING UNCERTAINTY
IN BOTH SUPPLY AND DEMAND

Driving the current uncertainty are a number of trends playing out


across the industry. On the supply side, the recent growth in oil
and gas production has been dominated by unconventional plays
in the US, a shift that has primarily benefited a small handful of
independent companies. By contrast, many established players
have been taken by surprise, requiring them to now rapidly reevaluate their strategic priorities and reshape their portfolios.
Recent changes in exploration have been even more dramatic.
New resources have come through major discoveries in previously
unexplored regions, notably in Brazil and Africa. Ultra-deepwater
plays now account for 40% to 60% of all newly discovered resource
volumes, yet the break-even prices to justify bringing such new
production on line are far higher than the current crude price
outlooks per barrel.
The demand side has been equally uncertain. The recent growth
in demand for oil and gas has come almost entirely from emerging
markets, particularly China and India. Demand from Organization
for Economic Co-operation and Development (OECD) countries
has eased due to a combination of higher prices, increased energy
efficiency, and alternate sources. Instead of closing refineries in
the OECD, however, companies have invested in more complex
cracking and coking capacities, exacerbating the surplus of petroleum products in export markets.
In addition to supply and demand factors, oil and gas companies
must invest in new technologies such as hydraulic fracturing and
enhanced oil recovery and deal with an increased regulatory burden,
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OIL & GAS FINANCIAL JOURNAL

WWW.OGFJ.COM

and an intensifying shortage of critical labor skills, largely due to


a maturing of the oil and gas workforce.
Collectively, these issues create a far more challenging environment, and they require that upstream companies change how they
chart out their future path. In the past, companies had the luxury
of a predictable world, with growing global production and demand,
clear growth targets, and an abundance of conventional opportunities. Consequently, many companies could get by with largely
similar strategies that emphasized common operational elements,
such as managing costs, exploiting technological advances, and
securing access to attractive reserves and for exploration
opportunities.
The prevailing approach in the past, which was felt to be appropriate as the industry invested in large, long-term, capital intensive projects, was linear. It resembled the way in which a railway
operator decides where to lay track and then proceeds with little
ability to make changes. The strategy was not just metaphorically
37

3/31/15 3:26 PM

on rails, it was in practical terms inflexible. Today, however, the


complexities and uncertainties of the market mean that such
strategies are inadequate to the task. Instead, companies that wish
to excel need a strategy that is dynamic and flexible. They will need
to be able to respond to changes more easily, in the same manner
that skilled sailors set a course that they broadly follow but that
they can change to accommodate the elements.
THE VALUE OF CAPABILITIES-DRIVEN STRATEGY

The most successful players in the future will therefore focus on a


small number of differentiating capabilities that make them distinctive in the market. By differentiating capabilities, we mean
the combination of individual knowledge, skills and behaviors,
processes, tools, and systems that allow a company to outperform
its peers in one specific aspect of the market.
There are many ways in which a company can differentiate itself
through excellence in a particular part of the oil and gas value
chain. For example, it can manage relationships in an important
region, or possess a strength in a particular technology, or have
expertise in certain commercial settings. Successful companies
also have a portfolio of assets that mesh with their capabilities,
driving stronger operational and financial performance.
For example, Occidental Petroleum has a portfolio dominated
by mature oil fields in which the company can deploy its expertise
in optimizing production and its leading position in enhanced oil
recovery. The company leverages strong commercial skills and
relationships to access new opportunities through direct negotiations with major resource holders, notably in the Middle East.
Recognizing its strengths, Occidental spends significantly less on
exploration than its peers. This factor contributes to its industry-leading profit margins.
Another example is Apache Corporation, which has a similarly
focused approach and targets discovered fields. However, Apaches
capabilities lie in cost reduction, infill drilling, and nearfield exploration. As with Occidental, Apache has been successful in securing
assets from super-majors based on its strong relationship management skills and ability to move quickly.
In contrast to Occidental and Apache, many companies
particularly recent entrants to the upstream sector often have
a portfolio of assets in numerous countries, with highly diverse
technical and operational requirements. Such portfolios are incoherent, in that they do not align with the companies capability-systems. As a result, these companies often underperform according
to both operational and financial parameters, including experiencing significant safety, environmental, or reliability issues.
The recent trend of a lift in the market value for companies such
as ConocoPhillips, Marathon, and Murphy Oil after they separated
their upstream and downstream operations reflects, in part, this
premium that markets place on focus and coherence around a set
of differentiated capability-systems. Indeed, this phenomenon
occurs in virtually all other industries as wellStrategy& research
has shown that coherent companies are usually rewarded with
higher valuation multiples.
38

1504ogfj_38 38

FLEXIBILITY IS CRITICAL

The right combination of capabilities and assets will vary from one
company to another, yet there is a common thread: strategy must
be flexible enough to adapt to changes in the operating environment. In the past, oil and gas companies had the luxury of investing
in attractive, long-term opportunities, and then focusing on executiona linear and inflexible approach. Today, by contrast, success
lies in flexibility: wherein capabilities set the broad direction, yet
flexibility still affords companies the freedom to anticipate and
respond quickly to unexpected events.
In some ways, flexibility is more difficult for oil and gas companies, given the long-term nature of many investments in the sector.
Decisions on major capital investments have become increasingly
challenging, particularly because of persistent project time and
cost overruns. Yet companies can still build significant flexibility
into their investment programs.
For companies active in exploration, the right approach might
involve taking small stakes in emerging basins in case significant
discoveries are made, and by actively managing the exploration
portfolio of options. For producing assets, a company can actively
consider, and plan for, the different activity sets it would need to
conduct under different oil price scenarios. Designing modular
field developments that can be scaled up in response to changing
market conditions also builds optionality into long-cycle investment
projects. This is particularly important for companies in volatile
operating environments, such as Iraq.
CONCLUSION

In an industry beset with increasing uncertainty, diverse technological and operational environments, and intensifying industry-specific skill shortages, oil and gas companies will need to
change the way they conduct business. For virtually all players, a
dynamic, capabilities-driven approach will help them win in a
turbulent market. To get there, companies must identify and focus
on a few differentiating capabilities required to win in their chosen
areas of operations. They must reinforce their portfolio and investments round those capabilities. Moreover, they must remain agile
enough to respond to changes in both internal and external
circumstances.
By implementing this approach, companies will position themselves to be able to respond efficiently to changing conditions, and
stay ahead of the competition.
ABOUT THE AUTHOR

Viren Doshi is a senior partner and leader of the energy


practice at Strategy& ( formerly Booz & Company), a
unit owned by PwC. Doshi has over 30 years of industry experience in the energy, oil, and gas sectors. Key
areas of expertise include managing supply and trading in volatile markets, designing innovative business
models, and implementing pioneering strategic transformations
and mergers. Doshi holds an MBA from Cranfield School of Management and an honors degree in electronic engineering from
Southampton University.
WWW.OGFJ.COM |

OIL & GAS FINANCIAL JOURNAL

APRIL 2015

3/31/15 3:26 PM

Hedging strategies surveyed


AEGIS ENERGY RISK AND OGFJ POLL OUR READERS ABOUT THEIR HEDGING DECISIONS
OGFJ RECENTLY TEAMED UP with Aegis Energy Risk, a Hous-

ton-based hedge advisory firm serving the oil and gas industry, to
conduct a detailed survey on hedging strategies. The anonymous
online survey was open to participants via www.ogfj.com during
late February and early March. The survey results provide a glimpse
into the strategies that responding producers currently employ.
Here are the questions and results:
QUESTION 1: What hedging tools does your firm utilize?
SURVEY RESULTS (See Figure 1):
Fixed price swaps 14%
Options (collars, puts, 3-way collars) 20%
Combination of the above 37%
None 29%

Yes, 50% to 75% 16%


Yes, 75% to 100% 10%
No 46%

QUESTION 2: What drives your firms hedging decisions?


QUESTION 4: Do you use an outside party to assist in making
hedging decisions?

SURVEY RESULTS (See Figure 2):


Fundamentals and market view 44%
Lender/investor requirements 19%
Drilling budget protection 13%
Gut feelings 24%

SURVEY RESULTS (See Figure 3):


Yes, a third-party advisor 40%
Yes, bank desks 23%
No 37%

QUESTION 3: Do you target a percentage of external debt


coverage when hedging?

SURVEY RESULTS:
Yes, less than 25% 4%
Yes, 25% to 50% 24%

SURVEY RESULTS (See Figure 4):


Board of directors 14%

F1: MY FIRM USES THE FOLLOWING HEDGING TOOLS:


None
29%

Fixed price
swaps
14%

Options
(collars, puts,
3-way collars)
20%

Combination
37%

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1504ogfj_39 39

OIL & GAS FINANCIAL JOURNAL

QUESTION 5: Who makes the final hedge decisions for your


firm?

WWW.OGFJ.COM

F2: MY FIRMS HEDGING DECISIONS


ARE PRIMARILY DRIVEN BY:
Gut feelings
24%

Drilling
budget
protection
13%
Lender/investor
requirements
19%

Fundamentals
and market view
44%

39

3/31/15 3:26 PM

F3: DO YOU USE AN OUTSIDE PARTY TO ASSIST


IN MAKING HEDGING DECISIONS?
No
37%

Yes, a third-party
advisor
40%

F4: WHO MAKES THE FINAL HEDGING


DECISIONS FOR YOUR FIRM?
Executive
management
65%

Board of
directors
14%

Hedge
committee
21%

Yes, bank desks


23%

Hedge committee 21%


Executive management (CEO, CFO, COO) 64%
QUESTION 6: Will your company spend more or less on CAPEX
in 2015 versus 2014?

SURVEY RESULTS:
More 23%
Less 60%
About the same 17%

QUESTION 7: Will your companys average production be more


or less in 2015 compared to 2014?
SURVEY RESULTS:
More 26%
Less 40%
About the same 34%

QUESTION 10: What percentage of production do you target


when hedging in between 12 and 24 months?
SURVEY RESULTS:
Less than 25% 23%
25% to 50% 36%
50% to 75% 24%
75% to 100% 17%
QUESTION 11: One year from now, what do you expect NYMEX
WTI Crude Oil prices to be?

SURVEY RESULTS:
Less than $50 3%
$50 to $70 60%
$70 to $90 24%
More than $90 13%
QUESTION 12: One year from now, what you do expect NYMEX
Henry Hub Natural Gas prices to be?

QUESTION 8: What is the production size of your company?


SURVEY RESULTS:
Less than 1000 boe/d 34%
1000 to 2500 boe/d 19%
2500 to 5000 boe/d 16%
5000 to 10,000 boe/d 6%
Greater than 10,000 boe/d 26%
QUESTION 9: What percentage of production do you target
when hedging in the first 12 months?

SURVEY RESULTS:
Less than 25% 27%
25% to 50% 21%
50% to 75% 32%
75% to 100% 20%
40

1504ogfj_40 40

SURVEY RESULTS:
Less than $2.50 9%
$2.50 to $3.25 41%
$3.25 to $4.00 36%
More than $4.00 14%
Thanks to Aegis Energy Risk President and CEO Chris Croom for
his part in developing this survey. Croom has spent nearly 20 years
in the energy markets developing hedge strategies, marketing
structured energy derivative products, and trading crude oil and
natural gas. Aegis Energy Risks clients include oil and gas producers,
energy consumers, and the petrochemical markets. Visit www.
aegis-energy.com for more information.

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OIL & GAS FINANCIAL JOURNAL

APRIL 2015

3/31/15 3:26 PM

Global shale lagging heres why


GAS-TO-WIRE MODULAR DEVELOPMENT MODEL PROPOSED
FOR SHALE INFRASTRUCTURE IN SOME COUNTRIES
ANDR OLINTO DO VALLE SILVA, MATHEUS NOGUEIRA, AND ANDR RAMOS, SBC, RIO DE JANEIRO

SHALE GAS DEVELOPMENT has revolutionized the US

energy industry, reversing a trend of rapidly declining domestic production. Between 2000 and 2015, natural gas
production from shale rocks increased by 10 Tcf/year, while
non-shale production fell by 4 tcf/year a slump of almost
a quarter.
The perennial question is whether the US shale revolution
will be replicated elsewhere around the world. The potential
is certainly there. The US Energy Information Administration,
for example, estimates that more than 90% of the worlds
technically recoverable resources are outside the US. But
this potential has not yet translated into significant production, even 10 years after the start of the US shale-gas boom
(Figure 1).
INFRASTRUCTURE BARRIER
TO SHALE DEVELOPMENT CYCLE

One reason for the slow progress is the limited reach of gas
pipeline systems in many of the countries that have promising
geological potential. Over one-third of prospective shale gas

fields in the 10 largest shale gas countries outside the US


have no access to gas pipelines. Overall, the gas pipeline
density in these 10 countries is 30 times lower than in the
US.
The shortage of infrastructure is a barrier to E&P activity
in general, both in conventional and unconventional developments. But it is particularly problematic in shale gas
projects. Because of the heterogeneous nature of shale formations, reserves must be proved on a well-by-well basis,
which requires intense drilling activity and a large number
of wells. Indeed, on average, shale deposits require 10 times
more wells than conventional deposits in order to prove
same amount of reserves (Figure 2).
In conventional E&P, reserves are mostly proved during
the exploration phase, after which a final investment decision
is made (Figure 3). In shale gas operations, by contrast, resource-evaluation is a continuous, cyclical process (Figure
4). New wells are drilled with two purposes: monetizing
production and generating cash flow; and acquiring subsur face data in order to provide a continual assessment of re-

F1: SHALE GAS RESOURCES ESTIMATES AND PRODUCTION


Many regions outside of the US are expected to hold
signicant amounts of shale gas resources

but these countries have not yet translated this


potential into significant production
Shale gas production; tcf/yr
Other countries
Canada
US

<1

Production outside of
North America is mainly
in China (90%) and
Argentina (10%)

Basins with
shale potential:

Assessed volume
Non-assessed volume

Estimated technically recoverable


resources of 7,201 tcf worldwide
(6,634 tcf, >90%, outside of the US)

<1

1995

2000

2005

12
2

10

2010

2015E

Source: EIA, Rystad, SBC Analysis

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3/31/15 3:28 PM

F2: NUMBER OF WELLS REQUIRED TO PROVE 10 TCF

Number of wells; average 2000-2013


Worldwide
conventional
gas avg.

Large
reserves
holders avg.

Countries
with largest
conventional
gas reserves

Qatar

Iran

Turkmenistan

UAE

19

Venezuela

35

Nigeria

75

US shale
gas avg.

174

Russia

1,417

Haynesville
US shale
plays

1,476

Marcellus

2,269

Woodford

3,152

Fayetteville

4,123

Barnett
50 200

10X

2,000

Source: EIA, BP, IHS, Schlumberger, press clippings, SBC analysis

sources in place. The prospect of profitable reserves additions


encourages the drilling of new wells and increases the cycles
momentum.
In the US, extensive infrastructure has enabled the immediate monetization of successful wells, encouraging gas
companies to drill and strengthening the shale development
cycle. Thousands of wells have been drilled every year in
several US shale plays, enabling operators continuously to
prove up reserves. But this cycle is unlikely to be sustainable
in areas with no access to gas pipelines: if there is no immediate means of monetizing production, large drilling campaigns, involving thousands of wells, are unlikely. As a result,
no significant amount of reserves will be proved and pipeline
investments will remain too risky (Figure 4).
OPPORTUNITY FOR GAS-TO-WIRE
MODULAR DEVELOPMENT

In several of the 10 largest shale gas countries outside the


US, electricity transmission networks are considerably more
extensive and dense than gas pipeline systems. The electricity
networks of China and South Africa, for example, are 10
times denser than their respective gas networks.
Examples of prospective shale-gas basins that lack pipeline
access but that are served by transmission lines include
Paran in Brazil, Karoo in South Africa, and Songliao in
China. Some of these resources are more than 500 kilometers
(about 310 miles) away from the nearest gas pipeline.
Relatively extensive electricity infrastructure creates op42

1504ogfj_42 42

portunities for an alternative, gas-to-wire (GTW) monetization model. This alternative model, which is being proposed
in this article, is designed to develop shale-gas reserves in
relatively small modules that can be systematically replicated
within the field, consisting of a group of wells capable of
producing at an expected plateau, connected to in-field gas
processing and power generation plants, to generate electricity and send it to consumers through existing transmission
lines (Figure 5).
The plants capacity determines the size of modular reserve
required i.e. the amount of gas needed to supply the power
plant over its operating life. As such, this alternative monetization model enables sustainable economic production in
regions with no gas infrastructure when only a relatively
small amount of gas reserves is proved, which requires a
limited number of wells before final investment decision: a
100 MW combustion turbine (CT) would require, over its
20-year operating life, modular reserves of 0.15 tcf, which
can be proven by an estimated 30 wells; a 500 MW natural
gas combined-cycle (NGCC) power plant, meanwhile, would
need 0.6 tcf, or an estimated 120 wells in order to prove
reserves.
Several incremental costs, or monetization costs, would
need to be factored into the local gas-sale price in order to
make the gas-to-wire model successful. These costs falls into
two groups: (1) the incremental costs of supplying gas directly
to a power plant; and (2) the incremental costs of creating
competitive operating conditions for the power plant.
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F3: DRILLING EFFORT AND PROVED RESERVES

Conventional onshore gas

Denition upfront
on the reserves

Shale gas (Marcellus example)

Cumulative proven reserves (tcf)

Cumulative proven reserves (tcf)

Required number of wells

Required number of wells


No clear moment to
develop infrastructure

73
47

Development of
infrastructure
822

1,464
5

2,121

2,151

1,739

14

Time
Permeability of reservoir makes it possible to estimate
reserves early on and with few exploratory wells, reducing uncertainties significantly faster than in shale plays

2,457

Time
The heterogeneity of shale formations means a significant number of wells and continuous drilling are needed
to prove up reserves and estimate resources

Source: EIA, Rystad, SBC Analysis

F4: INFRASTRUCTURE BARRIER IN SHALE DEVELOPMENT CYCLE

The first group comprises: the costs


of constructing and operating an infield gas-processing plant; and the cost
of non-produced gas (the portion of the
reserves that will not be able to sustain
the expected production plateau, due
to combined well declines).
The second group comprises: costs
related to increased transmission losses; higher transmission fees; the construction and operation of first-mile
transmission (i.e. connection between
the in-field power plant and the nearest
transmission line); and the incremental
cost of producing gas with little variability from the expected production
plateau, which will be necessary in case
regulation or commercial terms impose
the need for a constant supply of
electricity.
ATTRACTIVE ECONOMICS

Since electricity-transmission networks


in the 10 largest shale gas countries
outside the US are up to 10 times denser than gas-pipeline systems, distances
from prospective areas to the grid are
likely to be shorter than distances to
the nearest available gas pipeline. The
ratio between these distances is a fundamental factor in determining the
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OIL & GAS FINANCIAL JOURNAL

In the US shale gas development


model, virtually every successful well
had its gas monetized
This has fostered the constant
drilling efort, even when there was
no clear visibility on the amount of
resources to be found on those plays
Point at which it would make sense
to drill the next set of wells if gas
could be monetized
However, at this point it is riskier to
continue drilling in remote areas
aiming uniquely at gathering data
from the play, expecting to discover
enough resources to justify the
construction of new infrastructure

Drilling

Gas production
monetization

Subsurface data
acquisition

e
tur
rucer
t
s
ra ri
Inf bar
Resource
assessment

Source: SBC analysis

relative economic attractiveness of modular gas-to-wire model and the pipeline-transportation model.
The proposed model tends to be the better alternative the greater the ratio
becomes or the smaller the gas reserves being considered for development. When
the distance to the grid is the same as the distance to a gas pipeline a ratio of
1:1 gas-to-wire is an attractive alternative for plays with reserves of up to 1 tcf.
This rule-of-thumb (ratio of 1:1) is often used to model the economics of gas-towire systems but, in some regions, the 1 tcf figure is too conservative and caps
the attractiveness of GTW model at too low a level (Figure 6).
However, the cap on the size of reserves increases in relation to the relative
proximity of available transmission lines. For example, the proposed model remains

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F5: GAS-TO-WIRE MODULAR DEVELOPMENT MODEL


Replicable in-eld module
Wells

Processing
plant

Shale gas play

Monetization costs

Power
plant

To supply gas directly to the


power plant:
Local processing plant
construction and operation
Non-produced gas (not able to
sustain production plateau)
To create competitive conditions
for the power plant:
Increased transmission losses
Increased transmission fees
First-mile transmission construction
and operation
Leveled gas production (optional,
depending on regulation)

Combined production from


multiple wells
Small-scale processing plant
Power-generation plant
New first-mile
transmission lines

New first-mile
transmission line

In-eld module is composed by:

Existing transmission line

Consumers

Source: SBC Analysis

F6: MONETIZATION COST DIFFERENTIAL - GAS-TO-WIRE VS. NEW PIPELINE MODELS


Advantage for gas-to-wire model

USD/Mcf; 500 MW modules

3
2
1
0

Grid 5 times closer than pipeline


Grid 3 times closer than pipeline

Same distance to pipeline and to grid

Advantage for new pipeline model


3

10

Gas reserves (tcf)


Source: EIA, Statistics Canada, Global Transmission, press clippings, SBC Analysis

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1504ogfj_44 44

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attractive for reserves as large as 3 tcf or 6 tcf if the distance


to the grid is three or five times shorter than the distance
to pipelines, respectively.
The modular gas-to-wire model is expected to be a competitive economic solution for monetizing a shale play 500
km from gas pipeline infrastructure but five times closer to
the grid i.e. 100 km. With modular sizes of 500 MW or 100
MW, this model can add $1.4 to $1.5 per Mcf respectively, as
costs of monetizing the gas, respectively. This cost is comparable to the estimated $1.2 per Mcf cost of monetizing gas
produced in an area with access to gas pipeline infrastructure
and 500 km distant from the gas delivery point.
In case of non-existing gas infrastructure, constructing a
new pipeline to monetize gas to a delivery point situated
500 km away from producing area would only be an attractive
option if the reserves exceeded 6 tcf. But proving up this
amount of gas would require the drilling of more than 1,200
wells. However, constructing a pipeline before proved reserves
reached 6 tcf could result in extremely high monetization
costs if exploration fell short of expectations. For example,
if 0.5 tcf or 1 tcf of gas were discovered for a pipeline that
had been built to monetize over 6 tcf of gas, monetization
costs would reach $4.8 or $3 per Mcf, respectively.
The biggest sources of monetization costs of the proposed
gas-to-wire 500 MW modular development model are: $0.6
per Mcf for constructing and operating an in-field gas processing plant; $0.3 per Mcf for constructing and operating
the first-mile transmission line; and $0.3 per Mcf for increased
transmission fees, assuming distance-sensitive tariff for
transmission. However, the distance-sensitive tariff method
is a conservative assumption in view of other tariff structures
(e.g.: the classic postage stamp electricity tariff model).
Depending on the regulatory framework of local power
generation markets and commercial terms with consumers,
power output might need to remain flat, with no variability
throughout the plants operating life. This would require a
similar gas-production profile. Additionally, power-plant
operations can be adversely impacted by variations in
gas-supply volumes, which could also force the operator to
adopt production-variability reduction measures.
In order to minimize this problem and ensure gas supply
stability, a production buffer can be created by anticipating
drilling campaigns. In such a situation, production could be
controlled by choking back wells during periods of
surplus.
Measures such as this can ensure virtually stable production a 95% chance of achieving gas production variability
of less than 1%. This would increase the cost of gas at the
wellhead by a factor of ~10%. For example, monetization
costs would increase by $0.3 per Mcf if producing costs were
$ 3.00 per Mcf. If variability-reduction measures were not
adopted, probabilistic Monte Carlo simulations indicate,
with a confidence of 95%, that gas output would typically
vary 20% from the expected production plateau. Cost and
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variability parameters would vary according to several factors, such as the initial production rate from wells and plateau
production volume.
PROMISING ALTERNATIVE

The gas-to-wire modular development model is a promising


alternative for shale plays in underexplored basins with no
access to gas pipeline infrastructure, but with reasonable
access to electricity transmission networks. In order for plays
fitting this description to be commercial, the cost of gas at
the wellhead must be lower than the traded price at the city
gate, discounting the cost of monetization.
The models attractiveness is further strengthened when
the required investments are taken into consideration. This
is because the proposed model drastically limits the number
of wells required to prove up the reserves needed to justify
capital expenditure on monetization infrastructure (either
pipelines or GTW-related investments).
ABOUT THE AUTHORS

Andr Olinto do Valle Silva is senior vice president and Brazil office manager at the SBC office
in Rio de Janeiro, having led that office since
2009. Prior to that, he was a senior partner at
McKinsey & Company, where he led the electric
power and natural gas practice in Latin America
and served clients in the energy and basic materials sectors
for more than 14 years. Olinto has an electrical engineering
degree from Pontificia Universidade Catlica do Rio de Janeiro, where he also undertook graduate-level studies in
statistics and operations research. He has an MBA summa
cum laude from the University of Chicago Graduate School
of Business with a concentration in finance and
accounting.
Matheus Nogueira is a vice president with SBC,
based in Rio de Janeiro. He is an experienced oil
and gas professional, having worked both as a
strategic management consultant and in several
managerial roles within Schlumberger. He has
broad international experience, having worked
in North and South America, Europe, and Africa for a wide
range of clients in exploration and field development projects
the last 15 years. Nogueira has a degree in mechanical engineering and has developed a patented solution in fluid sampling, which has been adopted by the industry worldwide.

Andr Ramos is a consultant with SBC, based in


Rio de Janeiro. He is a mechanical engineer with
a degree from the Instituto Militar de Engenharia.
Prior to joining SBC, Ramos was with Shell, where
he conducted demand forecast and pricing analysis on fuels and lubricants, both for the maritime
segment.
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Buchachon | Dreamstime.com

The price of crude, the cost of data


REDUCING DATA COSTS WHILE IMPROVING DATA UTILIZATION WILL RESULT IN
A DRAMATICALLY REDUCED COST STRUCTURE
BILL BIEWENGA, QV21 TECHNOLOGIES INC., AUSTIN, TX

WE HAVE ALL READ that the market price of crude oil is down

CONVENTIONAL VS UNCONVENTIONAL

from prices a year ago. The fact is evident as we pass gas stations around the country and read the posted prices. That, of
course is the good news. The bad news is the effect it is having
on jobs and profitability in the oil industry.
The causes for the drop in crude oil prices are many and
debatable. Some say its oversupply. Others suggest that lower
demand, both domestically and globally, is the cause. Whether
we blame the Saudis or thank the frackers, there is little to be
gained or better understood by going down that path. Ultimately,
it comes down to economics. No one is going to pump oil for
long if it costs exploration and production companies more to
pump than they can recover when they sell it. When there are
ample supplies around, the cost of production plays an increasingly important role in viability.

Its not so easy to calculate the cost of drilling for oil. Different
types of wells cost different amounts of money, depending on
whether they are conventional or unconventional fracked wells.
Some geologies and cost factors favor one over the other. Typically, conventionally drilled wells, unburdened by the expenses
associated with fracking, are lower in cost to drill and
complete.
The wells are economically viable if the geology of the reservoir
is suitable. If the geology consists of shale and the reservoir requires more coaxing to get the oil to flow, fracturing the rock and
other technologies are required to pump the crude. That adds
cost to the process. If the oilfields are relatively new and gathering
pipelines, terminals, and railheads are few and far between, more
costs are added to the process. If the fields are located great

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distances from refineries, transportation charges add still more


cost whether the crude is moved from the oilfields to the refinery
by pipeline, rail, or barge.
Thanks to numerous technological advancements, drilling
costs have plummeted as single pads are now often used to drill
multiple wells and fracking techniques have been improved to
maximize initial production (IP) rates as well as estimated ultimate recovery (EUR) rates. As I write this article, delivered prices
at which oil is traded on the open market hover around $45 per
barrel in the US. It will undoubtedly be different next week.
THE BAKKEN

As an example, cost per barrel in the Bakken shale at highly efficient wells with high IP rates can be as low as $20/bbl to $45/
bbl or even higher, depending on the cost to drill a particular well
at a particular site. Whether or not its cost-effective to drill a
well depends on how much oil can be recovered both initially
and over time. IP rates quickly drop off, however, in fracked wells,
lowering the amount of oil thats being retrieved and raising the
cost per barrel.
Another aspect of Bakken oil wells is that there is typically an
80% decline in the production rate within the first year. Without
re-fracking the well, supply drops off quickly. However, because
Bakken wells produce so well and it is such high-quality, low-sulfur
crude oil, it is worthwhile for companies to accept that lower
recovery rate and production decrease. It is not uncommon to
see initial production of 1,000 barrels per day from these wells.
CANADIAN OIL SANDS

Although technologies and the resulting oil differ greatly, the


Canadian oil sands may break even at about $40/bbl. If the oil
sands production is already up and running with associated
infrastructure, breakeven may be as low as $10/bbl to $20/bbl.
SAUDI ARABIA

Due in large measure to geology and the fact that Saudi Arabias
oilfield infrastructure is already well established, the cost to drill
a barrel in Saudi Arabia is significantly lower than the cost per
barrel in most places. Ali al-Naimi, Saudi Arabias veteran oil
minister, recently said that the production costs in Saudi Arabia
are about $4 to $5 a barrel. Getting the crude out of the ground
is only part of the cost, however. There are still transportation
and transactional costs to consider.
Ultimately, whether the world uses oil from Saudi Arabia or
North Dakota, the decision will lie in the price that the purchaser
must pay on the open market. The solution for companies in the
US is to add efficiency to each and every action and
transaction.
Geologies, drilling methodologies, and transportation all contain variable costs, some of which are controllable, some of which
are not. While great strides have been taken in the area of production, much more is even now being done to lower the cost of
transportation. And still more needs to be done in the processing
of transactions.
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Electronic ticketing and order management allow


more efficient integration and utilization of data
throughout the oil and gas supply chain. Digitizing
the oilfield from the wellhead to the midstream is
the only solution to take advantage of this new
marketplace.

Traditional transactional methods require legions of people,


thousands of paper delivery tickets, and stacks of ledgers with
data input multiple times by multiple people throughout the
supply chain. With relatively new technologies of crude oil production bringing with them variable crude qualities and erratic
decline curves, crude gatherers and purchasers require improved
technologies to ensure they can balance their operational constraints against their commercial obligations.
In this environment, manual recording and reconciliation of
load data days or weeks after delivery will potentially result in
unmet deal obligations, improperly hedged positions, and significant end-of-the-month P&L swings.Timely, accurate, comprehensive data enable better data analytics, leading to predictive
analytics in the oilfield. Reducing data costs while improving
data utilization will result in a dramatically reduced cost
structure.
By utilizing the latest truck management technologies and
properly integrating the newly available real-time field data with
terminal operations and ETRM solutions, oil producers can
optimize their physical operations, reduce costs and exposures,
and improve profitability. Handwritten paper run tickets cost
money in labor at multiple levels throughout the supply chain,
adding inaccuracies and reducing timeliness. Waste, poor situational awareness, and inaccurate inventories cost real money
in good times and bad.
In good times, profits are reduced. In bad times with low crude
prices, the additional costs can mean ruination. Electronic ticketing and order management allow more efficient integration and
utilization of data throughout the oil and gas supply chain. Digitizing the oilfield from the wellhead to the midstream is the only
solution to take advantage of this new marketplace.
Low-cost information technology is in place to dramatically
reduce data costs, adding previously unavailable efficiency and
competitive advantage. Whether the price of crude is up or down,
the time is now.
ABOUT THE AUTHOR

Bill Biewenga is COO for Qv21 Technologies Inc.,


a provider of logistics support software for the oil
and gas industry. He has founded and built construction companies as well as a weather consulting
firm. Listed in the Guinness Book of Records,
Biewenga has written numerous articles about how
data is applied to improve competitive efficiencies.
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Christian Lagereek | Dreamstime.com

The Great Crew Change


OIL AND GAS COMPANIES MUST FIND QUALIFIED PERSONNEL TO FILL THE SHOES
OF AN OLDER WORKFORCE NEARING RETIREMENT AGE
KATE BIRENBAUM, SEYFARTH SHAW LLP, HOUSTON

THIS WILL BE A DIFFICULT YEAR in the oil and gas industry,

with the tumbling price of crude and the belief, voiced in some
corners, that the days of $100 per barrel oil may be behind us. This
is also the year when nearly 50% of the worlds oil and gas workers
become eligible to retire.
An estimated 71% of the energy workforce is 50 years old or
older, and the American Petroleum Institute says that as many as
50% of skilled energy workers may retire in the next five to seven
years. This event is commonly referred to as the Great Crew
Change.
This brings up some questions that beg to be answered:
How do the volatile price of oil and the rising number of retirements converge for energy companies?
How can companies in the energy space continue to prepare
for the Great Crew Change while hunkering down to survive and
even thrive in a down market?
SIGNIFICANT TALENT GAPS 1980S TO 2000S

The Great Crew Change itself is the confluence of two distinct


events the looming retirement of the huge cohort of Baby Boom48

1504ogfj_48 48

ers (those born between 1946 and 1964), confounded by the impact
of the downturn in the energy market beginning in the 1980s.
Between 1982 and 2000, nearly half a million jobs were shed from
the energy industry.
During that downturn, roughly 25% of engineers and geologists
left the energy market. Moreover, between 1984 and 1999, few
college students opted to go into energy-related fields. As a result
of the dearth of employees entering the energy field between 1984
and 1999, mid-career professionals are now in short supply, and
the industry finds itself with a large group of workers heading towards retirement and another group of inexperienced Millennials
unready to replace them.
2000S TO THE PRESENT

Using data collected by UCLA, one study found that from 1997
through 2005 the proportion of college freshmen planning to enroll
in STEM fields declined, hitting a low in 2005 of 20.7%. Thereafter
the percentage of freshmen planning to major in STEM increased
rose to 28.2% by 2011, as the 2008 recession prompted many to
focus on the job potential of various fields of study.
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It is obvious why schools have been seeing an uptick in students


seeking STEM degrees. In the US, drilling and petroleum engineering jobs are ranked as the first- and second-highest paying jobs for
recent graduates in STEM disciplines, and of the top 10 best-paying
jobs for recent graduates, eight are in engineering disciplines.
Having said that, there are caveats to the numbers of students
identifying an interest in STEM majors. Studies reflect that, of
students who initially identify a STEM major, nearly half fail to
graduate with such a degree. Moreover, in July 2014 the US Census
Bureau reported that 74% of those who received a bachelors degree
in STEM majors are not employed in STEM occupations.
IMPACT ON INDUSTRY IS PROFOUND

The potential long-term impact of the Great Crew Change is


considerable and profound. In 2013 Schlumberger predicted that
the oil and gas industry would have a shortage of about 15,000
experienced petroleum engineers and geoscientists by 2016. To
combat the effect of the Great Crew Change, the oilfield services
giant forecast that the industry would need to hire 10,000 new
petrochemical professionals every year through 2020 to offset retirements and meet the need for expansion.
More recently, in February 2015, Pearson Partners International
released the results of a survey of more than 200 senior executives
across the oil and gas energy spectrum. The survey revealed that
these executives identified a shortage of talent as one of their biggest challenges over the next five years. The Great Crew Change
is identified as the number one talent-related challenge, followed
by a lack of technical talent, such as engineers and geoscientists,
and a lack of leadership talent.
PRICE VOLATILITY RESULTING IN LAYOFFS

Against the backdrop of the Great Crew Change, tumbling oil prices
are having an impact on the oil and gas workforce. Bloomberg
reports that there have been more than 100,000 layoffs worldwide
in the industry since prices began to fall in the summer of 2014.
Indeed, we have all seen the headlines in recent months reflecting
the impact of tumbling oil prices, with oilfield service companies
announcing layoffs of thousands in recent weeks, and large independent oil companies issuing hiring freezes and closing branch
offices. If the price of oil remains low, companies will likely take
stronger measures.
Pearson Partners Internationals survey revealed that 59% of
those surveyed expect their segments to perform moderately or
significantly worse in 2015 than in 2014, although in the longer
term 76% expect their industry segments to perform significantly
or moderately better over the next five years.
Although the near-term outlook is more gloomy, 22% of those
surveyed still expect their headcounts to grow in 2015. Those who
expected to see decreases in headcount were oilfield equipment
and services suppliers, drilling contractors, and EPC companies,
whereas the major, independent, and national oil and gas companies
were more likely to take a balanced view of headcount in 2015.
One consulting group, Metroworth Consulting, suggested that
industry roles that will still be going strong in terms of hiring in
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2015 include downstream operations, Gulf Coast LNG occupations,


polyethylene plant staff, ethylene plant staff, project engineers
across multiple areas of expertise and sub-segments (non-exploration roles), and construction management specialists.
Metroworth also sees growth related to shale gas and tight oil
development and production. Finally, they are predicting growth
in East Africa, specifically Tanzania, Mozambique, and Kenya, due
to offshore gas discoveries.
SHORT-TERM OPPORTUNITIES

In the short term, the current down market may provide some
hiring opportunities. Hiring managers can focus on this new
availability of opportunity hires, noting that skilled people may
now be available at a more reasonable cost. Previously, when
oil had been $100 a barrel, there had been increases in salary
expectations to unsustainable levels. Employers offered lucrative bonuses in an effort to retain top talent in a highly competitive market and poached employees from competitors with
promises of high salaries and large bonuses.
However, in the current industry downturn, employers have
increased purchasing power when considering hires. One noteworthy exception will be companies offering retention bonuses
in the face of increased merger and acquisition activity. Another
potential impact is that companies can be more selective in
hiring during this period. For example, a STEM graduate with
a C average from a second-tier university may have been a hot
commodity when oil was $100 a barrel and such employees
were in demand. Now that oil prices have come down, job applicants will find the market for talent has become more
competitive.
Companies should not lose sight of the issues related to the
Great Crew Change, however, and the ways in which this round
of layoffs may compound existing and future talent gaps. For
example, skilled workers who are laid off in an energy downturn
may seek work in other industries that are also experiencing a
less-dire version of the Great Crew Change. The construction
industry, for instance, has struggled since 2009 to find craft
workers to fill positions, while those workers flocked to the
energy industry with promises of larger paychecks and lucrative
bonuses. Now the situation may reverse, as many energy workers move into the construction industry during the downturn
and thereafter refuse to rejoin the energy workforce.
Energy companies should make an effort to retain their
experienced workforce during this downturn. This issue can
be exacerbated by a reduction in workforce leading to increased
stress on remaining workers who also may leave, particularly
more experienced employees who may opt to retire.
A number of energy personnel consultants have opined that
employers should remain cognizant of the stress placed on the
industry by the dearth of employees in the mid-career cohort.
Given the existing knowledge and experience gap caused by
layoffs and hiring freezes in the last downturn, employers should
make a greater effort to retain workers to avoid such an outcome
when the market returns.
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At this time, employers also need to focus on


capturing and retaining the institutional knowledge that resides in the heads of these experienced engineers and geophysicists. Energy companies must develop a plan for the generational
hand-off of knowledge.

LONG-TERM OUTLOOK

It is important for employers not to lose sight of the importance


of long-term planning. Put simply, the current market downturn
will have virtually no impact on the Great Crew Change, which is
coming whether oil is booming at $100 a barrel or moving along
at $45 a barrel. Indeed, recent Global Oil & Gas Salary Guide survey
data revealed some of the conflicting challenges facing employers
in this economy: companies need to complete current projects,
reduce costs to reflect the new economic realities, while still working hard to retain talent as part of their succession plans.
This long-term planning involves key elements that many energy
employers are already focusing on as part of their workforce strategy.
First, employers are focusing on ways to retain their experienced
workforce. While these employees reach retirement age in increasing numbers, employers are seeking creative ways to retain their
skill sets by entering into consultative arrangements or offering
more flexibility to allow part-time work.
At this time, employers also need to focus on capturing and
retaining the institutional knowledge that resides in the heads of
these experienced engineers and geophysicists. Energy companies
must develop a plan for the generational hand-off of knowledge.
An effective plan would include the development of processes for
(1) identifying key roles and processes for inclusion in the plan; (2)
capturing institutional knowledge for those roles and processes;
and (3) developing systems for transmitting that knowledge to
identified individuals. One way to reinforce the need for this information transmission would be for employers to link knowledge
continuity to competency programs and career development.
Employers should also be exploring ways to backfill the roles
of mid-level engineers, supervisors, and other roles that are scarcely
populated because of the downturn that began in the 1980s. One
way employers are trying to close this gap is by focusing on candidates outside of the energy industry. For example, employers are
considering potential hires with a military background who have
easily-transferrable skill sets and often have prior education or
experience in energy-related fields.
Some employers are looking in other industries for candidates
willing to make a shift into the energy industry engineers with
construction backgrounds or health and safety employees from
other industries. In the near term, employers are also focusing on
filling roles with people with a greater breadth of skills and experience, as roles may consolidate, and also increasing use of contract
workers to create a more flexible staffing environment.
Yet another option is to cast a wider net and look globally for
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candidates, particularly when other countries may have higher


numbers of individuals receiving STEM education and training.
For example, while 13% of college degrees awarded in the US are
in science and engineering, in China those degrees comprise 41%
of university degrees awarded.
Finally, with regard to the employee pipeline, employers are
increasingly focused on the need to channel more students into
STEM degrees and energy jobs. This focus often involves partnering
with local college and universities and developing programs to
interest high school students in pursuing a STEM-focused education, often with a focus on females and minorities. Some suggest
that, in order to draw the next generation of scientists to STEM
education, an interest in science must be encouraged even earlier
than college or high school, by focusing on children as young as
elementary-school age.
Companies are also focusing hiring strategies on the different
interests of Millennials. Studies suggest that Millennials have very
different ideas about the workplace. These strategies address both
hiring and retention. For example, Millennials are extremely active
on social media, unlike prior generations, so a recruitment strategy
should include a social media component. Nearly half of all Millennials are looking for their next job on LinkedIn. Consequently,
there are more than 5,000 oil and gas LinkedIn groups, with about
500 focusing specifically on jobs.
With regard to retention, Millennials seek positions based on
the experience that they provide, and may focus more on perquisites
aside from a high salary. They look for companies that seek to
maintain a work-life balance, and they do not have the same attitude about employment longevity as their predecessors; they
expect to work for many companies during their work life. Companies seeking to hire Millennials should be aware of these preferences because the type of workplace that appealed to Baby Boomers
or Generation Xers hold little appeal for Millennials.
CONCLUSION

This year will require energy companies to make many strategic


decisions as they navigate the downturn. These strategies must
take into consideration the coming of the Great Crew Change. Part
of the reason why the energy industry is experiencing more significant workforce challenges that other industries is because the
downturn in the 1980s led to hiring and other strategic decisions
that continue to impact the energy industry to this day.
Going forward, employers should make strategic decisions with
an eye towards long-term staffing needs so that they do not find
themselves facing another Great Crew Change 20 or 30 years from
this downturn.
ABOUT THE AUTHOR

Kate Birenbaum (kbirenbaum@seyfarth.com) is senior counsel in the Labor and Employment practice
of law firm Seyfarth Shaw LLP in Houston. She advises
clients in the energy sector on a variety of employment
law matters and represents them in administrative
matters as well as litigation.
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Oil and gas disclosure rules


PART THREE OF A THREE-PART SERIES: 2013-14 SEC STAFF COMMENTS ON COMPANIES COMPLIANCE
MARC FOLLADORI, ATTORNEY-AT-LAW, HOUSTON

THIS IS PART THREE OF A THREE-PART SERIES addressing

publicly-held exploration and production companies compliance


with amended oil and natural gas disclosure rules adopted by the
Securities and Exchange Commission (SEC) in late 2008. Part one
appeared in the February issue of Oil & Gas Financial Journal. Part
two appeared in the March issue. Analysis of compliance efforts
have largely been based upon review of comment letters issued by
SECs Division of Corporation Finance, beginning in 2010. Comment
letters to companies reflect the SEC staff s views on whether and
to what extent the companies are complying with SEC regulations
and accounting rules.
FINANCIAL AND ACCOUNTING COMMENTS

Costs and Prices. Since 2012, it appears that the staff has engaged
in a more granular review of E&P companies financial and accounting disclosures. Many staff comments during the 2013-14 review
period dealt with how companies determined their costs for financial
accounting purposes whether under the successful efforts method
or the full cost method as well as for purposes of calculating the
SM and other data required under Regulations S-X and S-K.
A more frequent comment during 2013-14 was whether, in
computing net operating income in connection with companies
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SM determination, abandonment costs had been taken into account


in their future development costs (Petron Energy II Inc. (Feb. 21,
2014); Santa Maria Energy Corp. (Jan. 16, 2014); Enduro Royalty
Trust (Dec. 30, 2013); Southwestern Energy Co. (Sept. 25, 2013); EV
Energy Partners LP (Sept. 11, 2013); EOG Resources Inc. (Aug. 29,
2013)). The staff often referred these companies to a form of letter
sent in 2004 to chief financial officers of E&P companies that expressed staff views that estimated cash outflows associated with
oil and gas assets expected abandonment were asset retirement
cost obligations that should be included when determining the
standardized measure (Sample Letter Sent to Oil and Gas Producers
(Feb. 24, 2004) at http://www.sec.gov/divisions/corpfin/guidance/
oilgasletter.htm).
There were also numerous comments about property acquisition,
drilling and development costs applied for purposes of calculating
companies standardized measure and their capitalized cost ceiling
or impairment tests. Companies were often criticized that their
treatment of these costs did not conform to applicable accounting
guidance, which resulted in questions regarding uncertainties regarding their PUDs and other reserves (Gastar Exploration Ltd.
(Sept. 12, 2013); RSP Permian Inc. (Dec. 4, 2013)). Where the staff
noted that at year-end 2013, a companys standardized measure
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was more than its net capitalized oil and gas assets subject to depreciation, it requested the company to provide it with a summary,
broken down by cost center, of its ceiling test calculations, and a
reconciliation of the sums used in that calculation to its balance
sheet or standardized measure, as appropriate (Triangle Petroleum
Corp. (Jan. 30, 2014)).
Correspondence between the staff and one company during
2013-14 illustrates issues companies have had in conforming their
accounting methods to staff guidance. Devon Energy Corp. did not
include certain general and administrative costs in calculating its
capitalized costs for ceiling test purposes because it did not consider
them to be well-level expenditures. However, it did include them
in connection with determining its results of operations and for
purposes of its SM. The staff questioned Devons authority for this
disparity in treatment. Devon argued that its treatment for the G&A
expenses in question (which it referred to as production support
costs) was proper and based on the same accounting treatment
that it employed in its joint operating agreement accounting procedures. After much back-and-forth, Devon finally agreed with the
staff s contentions. However, one day later, Devon decided to reverse
its decision (see Devon Energy Corp. (Feb. 7, 2014); response letters
(Feb. 26 and 27, 2014)).
Companies treatment of transportation costs received additional
attention during 2013-14. The staff asked one company how its oil
& gas transportation costs had been incorporated into its historical
and projected (for purposes of its SM determination) production
costs, or into its average sales price per unit of production, pointing
out that transportation costs should be reflected in either the prices
the company is paid or the costs it incurs (RSP Permian Inc. (Nov.
4, 2013)). In EP Energy Corp. (Oct. 2, 2013), the staff asked a company
to explain how its transportation costs had been incorporated in
its estimated proved reserves, associated future net income and
the standardized measure. Where the disclosures had been unclear,
the staff asked whether companies oil and gas prices as reported
had been inclusive of certain adjustments, such as differentials for
transportation, quality, gravity or btu content (Santa Maria Energy
(Jan. 16, 2013); FX Energy Inc. (Jan. 10, 2014)).
In addition to costs, there were also comments addressing how
companies determined their average sales price per unit of production as required under Regulation S-K Item 1204(b). One company,
in determining its average sales price per unit of production, had
wrongfully taken into account the impact of hedges. The staff
pointed out that average sales price determinations should exclude
hedges impact (Vanguard Natural Resources LLC (Sept. 10, 2013)).
As the case with prior review periods, the staff continued to ask
companies about the potential for ceiling test write-downs (e.g.,
Forest Oil Corp. (Apr. 9, 2014)) and their property cost amortization
practices (see EOG Resources Inc. (Aug. 29, 2013)).
MLPs and Distributable Cash Flow. During the 2013-14 review
period, the staff directed many comments to E&P master limited
partnerships and their calculations of projected Distributable Cash
Flow, to indicate to investors the expected continued stability of
their distributions for the future. A key element of the formula for
determining estimated Distributable Cash Flow is maintenance
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capital expenditures, a concept used to describe the level of capital


expenditures required to maintain an MLPs operating assets, operating cash flow or operating capacity, and to quantify the extent
to which the MLPs productive capacity, in terms of production and
total reserves, must be maintained from period to period. One
company defined maintenance capital expenditures as the estimated amount of capital required to hold production flat on a
long-term basis. The staff asked this company how it calculated
those expenditures, including whether they represented actual or
budgeted expenditures, and requested a clarification of the targets,
in terms of production or proved reserves, that were intended to
be achieved (Legacy Reserves LP (Sept. 4, 2013 and Oct. 31, 2013)).
Another letter asked a company to revise its calculation of maintenance capital expenditures and how they differed from its other
capital expenditures; the company was also asked about the underlying assumptions used in its determination, including how it
chose its wells, formed expectations about their production profiles
and took into account the impact of derivatives related to production
to be sold (Atlas Resource Partners LP (Aug. 9 and Oct. 30, 2013)).
The enhanced disclosures were intended to convey a better understanding of why maintenance capital expenditures were a meaningful sum to investors, and the extent of their correlation with
changes in reserves and production (Linn Energy LLC (April 25,
2013, made publicly available in June 2014)).
Derivatives. Accounting treatment of companies commodity
derivative instruments was a popular topic for the staff during the
second half of calendar 2013. Where a company had incorrectly
disclosed in its market risk disclosures that changes in the fair value
of its derivatives not qualifying as cash flow hedges were recorded
in gas and oil sales, the staff asked the company to revise its statement to indicate that changes in the fair value of its derivatives were
recorded in the companys income statement line item gain (loss)
on derivatives, and asked the company to confirm that its hedge
ineffectiveness was recorded in gas and oil sales rather than as a
component of the gain or loss on derivatives (Southwestern Energy
Co. (Sept. 25, 2013)).
E&P companies that did not choose to designate, or were unable
to qualify, their commodity derivative instruments as cash flow
hedges recorded changes in the fair value of those instruments in
their current earnings. Many of these companies had presented
their changes in fair value of their derivatives in their income statements in two components (i) realized gains and losses and (ii)
unrealized gains and losses. Proceeds and accrued receivables on
settled positions were generally shown as realized gains or losses,
while the periodic changes in fair value of derivatives were shown
as unrealized gains or losses. The staff contended that presenting
these amounts separately on the face of the income statement did
not conform to accepted accounting guidance, which does not
differentiate between realized and unrealized sums for purposes of
showing fair value gain (loss) on derivatives (see Linn Energy LLC
(May 28, 2013); EXCO Resources Inc. (Sept. 11, 2013); Range Resources Corp. (Sept. 19, 2013 and Jan. 27, 2014)). Companies argued
that the bifurcated presentation provided more clarity and transparency to investors by showing both cash and non-cash effects on
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derivatives fair value changes. The staff cited previous (albeit obscure)
authority for their position from the SEC website: Transcript - Speech
by G. Faucette, 31st AICPA National Conference on Current SEC
Developments (Dec. 11, 2003) at http://www.sec.gov/news/speech/
spch121103gaf.htm. There, the staff indicated its view that the
presentation of unrealized gains (losses) in one income statement
line with a reclassification of realized gains and losses to another
line was essentially a form of synthetic instrument accounting
the practice of integrating two or more transactions into a single
transaction for purposes of recording gains, losses and income
which had been discredited by the accounting profession. See Santa
Maria Energy Corp (Jan. 16, 2014); Gastar Exploration Ltd. (Sept.
12 and Oct. 21, 2013); QR Energy LP (Sept. 24, 2013); Antero Resources
Corp. (Aug. 16 and Sept. 19, 2013); Equal Energy Ltd. (Aug. 27, 2013);
Penn West Petroleum Ltd. (Aug. 23, 2013); WPX Energy Inc. (Aug.
23, 2013).
In July 2013, Linn Energy LLC and its affiliate, LinnCo LLC disclosed that the SEC staff had commenced a private inquiry, requesting documents and communications potentially relevant to, among
other things, the companies disclosures related to hedging
strategy.
ENGINEERING INFORMATION

A consistently disappointing area in terms of companies and engineering firms compliance with the amended oil and gas disclosure
rules has been the continuing failure by many to observe all of the
requirements of the SECs reserve engineering disclosures especially
regarding third-party engineers reports filed as exhibits to the filings.
Numerous comments addressed engineers reports simply failing
to meet all the requirements of Item 1202(a)(8) of Regulation S-K,
which requires specific disclosures in the report about the engineers
role in connection with the preparation of the report or the preparation (or audit) of the companys reserves estimates (see Daybreak
Oil and Gas Inc. (Feb. 20, 2014); Red Mountain Resources Inc. (Mar.
26, 2014); Lucas Energy Inc. (Mar. 18, 2014)). One report had omitted
to include numerous items required by Item 1202(a)(8), such as a
statement regarding the purpose for which the report was prepared,
the date on which the report was completed (in addition to its effective date), the proportion of the companys total proved reserves
covered by the report and, as part of the reports primary economic
assumptions, the realized prices by product type for the reserves
covered by the report (EPL Oil & Gas Inc. (Dec. 19, 2013).
Also troubling was continuing instances of inconsistencies between information and data contained in the engineers reserve
report and that contained in the forepart of the filing. For example,
a number of engineers reports had included summary presentations
of estimated probable reserves, while the forepart of the filing had
not included any references to probable reserve estimates. To remedy
the inconsistencies, the staff generally asked the company either
to file a revised engineering report, deleting the references to probable
reserves, or else amend the entire filing to include probable reserves
estimates wherever required (Petron Energy II Inc. (Feb. 21, 2014);
Sundance Energy Australia Ltd. (Jan. 15, 2014); Equal Energy Ltd.
(Nov. 14, 2013); FX Energy Inc. (Sept. 26, 2013)). Another letter
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pointed out that certain pricing assumptions used by a company


in calculating its standardized measure as disclosed in the forepart
of the filing were not the same as the pricing assumptions used by
the engineers as contained in the engineers report (Gastar Exploration Ltd. (Sept. 12, 2013)).
As in prior periods, the staff commented frequently that companies filings failed to include required disclosures addressing the
qualifications of the technical persons primarily responsible for
overseeing the reserves estimates preparation and primarily responsible for overseeing the reserves audit (if one was conducted
by independent engineers) (Parsley Energy Inc. (Feb. 3, 2014); Santa
Maria Energy Corp. (Jan. 16, 2014); Rex Energy Corp.(Dec. 30, 2013);
Lucas Energy Inc. (Mar. 18, 2014); EPL Oil & Gas Inc. (Dec. 19, 2013);
FX Energy, Inc. (Sep. 20, 2013 and Jan. 10, 2014); Endeavour International Corp. (Sept. 19, 2013); Imperial Oil Ltd. (Sept. 11, 2013);
Cabot Oil & Gas Corp. (Aug. 29, 2013)).
Particularly in the case of IPOs (which generally involve first-time
registrants unfamiliar to the staff), the staff made many staff requests
for detailed engineering data as supplemental information that
would support the companies estimated reserves. For example, in
Antero Resources Corp. (Aug. 16, 2013), the staff asked for technical
data to support the companys booking of probable reserves attributable to locations within a 3-mile radius of existing production in
the Marcellus and Utica shale areas. The questions included whether
any of the companys estimated proved developed producing reserves
in those formations had been deterministic estimates and if so,
to what extent had those estimates been based on one or more
types of curves for the subject formation or else supported by other
methods, such as volumetric calculations, reservoir simulation or
probabilistic methods. Also, the company was requested to provide
the staff with summary information as of June 30, 2013 in spreadsheet
format, of the gross estimated ultimate recoverable quantities in
bcfe, the average btu content and the total lateral length of completion for each proved, probable and possible location in such
formations, along with rate/time plots for each of the three largest
proved developed producing wells and each of the three largest
PUD locations in each formation. In Matador Resources Co. (Dec.
27, 2013), the staff asked the company to provide a schedule by each
of its operating areas (e.g., Eagle Ford, Haynesville, Cotton Valley,
etc.) that would show initial booking dates for its PUDs, the investments and progress that it made by year and the remaining investments and timeline in order to complete the conversion of its PUDs
to developed reserves.
ABOUT THE AUTHOR

Marc Folladori has been an M&A and securities attorney in Texas since 1974, and has extensive experience representing energy companies and firms engaged in energy investment and finance. Before his
retirement from Mayer Brown LLP in 2014, he served
as the head of the firms Global Energy Practice. The
author wishes to acknowledge the research and other contributions
in connection with this article made by Amelia Xu while she was
an associate at Mayer Brown LLP during 2014.
53

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DEAL MONITOR

Lots of talk but little action except


for private equity and Canada
DAVID MICHAEL COHEN, PLS INC., HOUSTON

PLS REPORTS that the upstream deal markets remain ane-

mic as oil futures continue to search for a bottom. From February 17 through March 16, just five upstream transactions
were announced in the US with disclosed values totaling $61
million. There are plenty of buyers in the market, as many
companies have indicated their intent to take advantage of
the downturn to buy more assets. However, while the oil price
collapse has hurt many E&P firms cash flow, companies still
are not willing to sell at steep discounts to a longer view of oil
prices particularly for cash. The equity and debt markets are
still working to keep US drillers turning to the right, albeit
with significantly reduced capex budgets vs. 2014.
As an illustration, leading Bakken shale producer Whiting
Petroleum on March 23 announced it will raise over $3 billion
in offerings of shares and notes to address debt taken on for its
$6 billion Kodiak Oil & Gas acquisition last year. The new financing puts to bed media speculation that had been circling

for weeks about a potential sale of the company, despite reports that ExxonMobil, Statoil, Continental Resources and
Hess were all considering bids in order to expand their Bakken
positions.
On the capital side, private equity remains a force to be
reckoned with, particularly in the conventional oil and gas basins. In the one US upstream deal to break the $10 million
mark, Midstates Petroleum agreed to sell its last remaining
legacy properties along the Gulf Coast in south Louisiana for
$44 million to Pintail Oil & Gas, a portfolio company of PE
firm Ridgemont Equity Partners. The purchase price was a
steep discount to the $80 million Midstates would have gotten
under a previous PSA with Houston-based startup Baseline
Energy Resources that fell apart in December. The assets cover 12,700 net mineral acres in the DeQuincy area of Beauregard and Calcasieu parishes with YE14 production of 1,300
boe/d generated by horizontal Wilcox development.

PLS INC. MONTHLY DEAL MONITOR - SELECT TRANSACTIONS 02/17/15 - 03/16/15


US TRANSACTIONS

Date Announced

Buyer

Seller

Asset Location

10-Mar-15

Pintail Oil and Gas

Midstates Petroleum

GC Onshore: S. LA.

4-Mar-15

CapGain Properties

Landmaster Partners

Permian: Mulitple

20-Feb-15

BE Resources

Southern Oil & Gas

Eastern: Kentucky

Asset Location

INTERNATIONAL TRANSACTIONS

Date Announced

Buyer

Seller

13-Mar-15

Senex Energy

Orca Energy

Australia

12-Mar-15

Interra

PT Benakat et al

Indonesia

12-Mar-15

Tourmaline Oil

Perpetual Energy

Canada: Wilrich

4-Mar-15

Virginia Hills Oil

Undisclosed

Canada: Slave Point

2-Mar-15

MidWestern Oil & Gas

Mart Resources

Nigeria

2-Mar-15

MMK Norilsk Nickel

Gazprom

Russia

25-Feb-15

Marquee Energy

Undisclosed

Canada: Alberta

20-Feb-15

Kelt Exploration

Artek Exploration

Canada: Montney

19-Feb-15

Bonterra

Enerplus

Canada: Cardium

17-Feb-15

Cardinal Energy

Virginia Hills Oil

Canada: Alberta

17-Feb-15

Virginia Hills Oil

Pinecrest Energy

Canada: Alberta

PLS Inc. Validity of data is not guaranteed and is based on information available at time of publication.
Prepared by PLS Inc. Source: PLS Derrick Global M&A Database. For more information, email memberservices@plsx.com

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DEAL MONITOR

With the exception of its undeveloped Fleetwood acreage


in the same area, Midstates will now be a Mid-Continent
pure-play targeting the Mississippi Lime in northern Oklahoma and the Cleveland and other stacked formations in the
western Anadarko Basin. In February, Houston-based Midstates initiated a strategic alternatives process led by Evercore
after seeing its stock fall to just over $1.00 from a 2014 high of
$7.40/share last June.
Looking ahead, PE investor Quantum Energy Partners is
working with Linn Energy to fund $1 billion for acquisitions.
Linn will have the opportunity to participate with a 15% to
50% working interest as well as an opportunity to earn a promoted interest. Combined with the ability to leverage up, this
commitment allows Linn to target over $2.5 billion of acquisitions. This follows a $500 million commitment to Linn by
Blackstone credit platform GSO Capital Partners in January
under a unique arrangement in which GSO will receive 85%
WI in newly drilled wells, decreasing to 5% once the wells
achieve a 15% IRR. In another positive sign from the PE markets, Natural Gas Partners is backing Bonanza Creek cofounder Michael Starzers new venture Fifth Creek Energy
Company for acquisitions in the DJ Basin, Permian and/or
ArkLaTex region.

The most active area in the upstream deal market right now is
Canada, where from February 17 through March 16 there were 10
transactions announced with disclosed values totaling $724 million. Standout deals include Kelt Explorations $242 million acquisition of Artek Exploration to consolidate its position in the Inga,
Fireweed and Stoddart areas of northeast British Columbia and
Tourmaline Oils $202 million purchase of Deep Basin peer Santonia Energy. Consideration in both transactions consisted entirely
of stock and assumed debt, providing upside for shareholders of
the acquired companies upon the recovery of oil and gas prices.
In contrast with the US, low commodity prices have already dried
up the capital markets for Canadian oil and gas companies, so the
much anticipated process of basin consolidation is underway.
Outside of North America there were eight deal announced
during the month with disclosed values totaling $512 million.
The lions share of that total came from Nigerian producer Midwestern Oil & Gas $324 million takeout of partner Mart Resources and Swiss petrochem firm Ineos expansion of its UK
shale portfolio via a $143 million acquisition from IGas Energy.
Both moves follow fiscal measures by these countries to increase industry activity: shale drilling in the case of the UK and
the acquisition of oil licenses by local companies in the case of
Nigeria.

Proved Reserve
Value ($MM)

Non Proved
Reserve Value
($MM)

Proved
Reserves
(MMBoe)

Production
(Boe/D)
1,300

Category

Deal Type

Hydrocarbon

Deal Value
($MM)

Conventional

Property

Oil + Gas

$44

$44

NA

Conventional

Property

Oil

$9

$9

NA

82

Conventional

Acreage

Oil

$3

$3

NA

NA

$56
3

$53

$3

NA

1,382

Total Transaction value


Number of Transactions

Deal Type

Hydrocarbon

Deal Value
($MM)

2P Reserve
Value ($MM)

Conventional

Property

Oil

$2

$2

NA

Conventional

Corporate

Oil

$7

$7

NA

NA

Unconventional

Property

Gas

$202

$202

19.2

4,600

Unconventional

Corporate

Oil

$11

$7

$4

2.6

88

Conventional

Corporate

Oil

$324

$324

16.9

4,764

Conventional

Corporate

Gas

$22

$22

NA

NA

Conventional

Property

Oil

$13

$13

2.9

264

Unconventional

Corporate

Gas

$242

$151

$91

37.1

4,320

Unconventional

Property

Oil

$139

$139

10.4

1,440

Conventional

Property

Oil

$19

$19

0.3

136

Conventional

Corporate

Oil

$92

$92

NA

1,224

$1,072
11

$754

$318

89.5

16,836

Category

Total Transaction value


Number of Transactions

Non 2P Reserve 2P Reserves


Value ($MM)
(MMBoe)

Production
(Boe/D)
NA

Note: Canada transactions assume 20% royalty, unless disclosed.

APRIL 2015

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55

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OGFJ100P

Private company update


MIKAILA ADAMS, EDITOR OGFJ

INDEPENDENT RESEARCH FIRM IHS has provided OGFJ with

updated production data for the OGFJ100P periodic ranking of


US-based private E&P companies. The rankings are based on
operated production only within the US.
TOP 10

The biggest change in the April installment of the OGFJ100P


from the list published in January is the omission of Citrus
Energy Corp. The Castle Rock, CO-based company was previously listed in the ranking at No. 29, but has since sold its
Marcellus assets (more on that to come), pushing the company
out of the list of the largest privately-held companies ranked
by BOE.
In another, move, albeit less dramatic, Houston, TX-based
Citation Oil & Gas Corp. jumped from its previous spot at No.
15 in the January installment to its current seat at No. 9. The
company also moved from the No. 6 spot on the Top 10 Private
Liquids Producers list to the No. 3 spot. According to the company website, Citation is the second largest producer of crude
oil in Oklahoma. The company lists southern Oklahoma as the
majority source of its proved reserves, and operations in the
Ardmore Basin play into the mix.
Chief Oil & Gas LLC moved from No. 6 to No. 3 in the BOE
ranking, and jumped above Hilcorp Energy (still at No. 1 in
TOP 10 PRIVATE GAS PRODUCERS
Rank

100P
Rank

Samson Investment Co.

3
4
5

overall production) in the Top 10 Private Liquids Producers list.


Walter Oil & Gas Corp., No. 13 in the OGFJ100P ranking for this
issue, lost its previous spot at No. 10 in the Top 10 Private Gas
Producers list. Moving into the Top 10 Private Gas Producers
list for this issue is J-W Operating Co. The company, which
ranks No. 20 overall, comes in as the No. 8 private gas
producer.
CITRUS EXITS MARCELLUS

In October 2014, privately-held Citrus Energy Corp. closed on


a deal with Warren Resources Inc. in which it sold essentially
of its assets in the Marcellus shale play. The deal, announced
earlier in the summer, was part of a deal Warren struck with
Citrus and two additional working interest owners for $352.5
million.
To purchase price to Warren to enter the areaits previous
core consisted of California oil and Wyoming natural gasconsisted of $40 million in Warren common stock priced at $6.00
per share, and approximately $312.5 million paid in cash.
In June, before the deal closed, the assets produced an estimated 82 million net cubic feet per day of natural gas. Estimated
net proved reserves, as of the July 1 economic effective date,
totaled approximately 208.3 billion cubic feet, 55% proved developed, as estimated by Netherland, Sewell & Associates Inc.
TOP 10 PRIVATE LIQUIDS PRODUCERSUCERS
Rank

100P
Rank

Company

Liquid (bbl)

203,847,324

LLOG Exploration Co. LLC

16,638,801

Chief Oil & Gas LLC

197,346,610

Hilcorp Energy Co.

12,312,384

Hilcorp Energy Co.

189,534,624

Citation Oil & Gas Corp.

12,095,536

Merit Energy Co.

109,387,735

Mewbourne Oil Co.

11,219,023

Mewbourne Oil Co.

84,747,429

14

Slawson Exploration Co. Inc.

11,123,746

Yates Petroleum Corp.

66,164,768

12

Petro-Hunt Group

10,219,979

18

WildHorse Resources LLC

60,639,166

Endeavor Energy Resources LP

10,071,794

20

J-W Operating Co.

54,888,972

16

Hunt Oil Co.

9,055,431

LLOG Exploration Co. LLC

54,265,714

10

Sheridan Production Co. LLC

8,755,365

10

19

Templar Energy LLC

48,472,936

10

Merit Energy Co.

8,434,528

Company

Source: IHS

Gas (Mcf)

Source: IHS

Software for Energy


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OGFJ100P
President and co-founder of Citrus, Lance Peterson, joined
Warrens board of directors. Key technical, operating, and land
personnel are transitioning from Citrus to Warren as employees,
including Zachary Waite, who will assume the role of vice
president of business development and Marcellus operations,
and Daniel Collins, who will assume the role of vice president
of Marcellus land.
BMO Capital Markets served as financial advisor, and Thompson & Knight LLP served as legal advisor to Warren. Jefferies
LLC served as financial advisor, and Vinson & Elkins LLP served
as legal advisor to Citrus.

the deal helps bolster the companys position among the top
10 oil & gas producers in Colorado, where the company continues to look for additional acquisitions of wells, acreage and
non-consenting working interests.
Rich Frommer, president and CEO of Great Western Oil &
Gas, said the aquisition is a great example of our strategy to
expand our holdings in the Wattenberg Field, particularly during
the current period of variability in the industry, and achieve
economies of scale throughout our operations in Northern
Colorado. We continue to search for additional suitable wells
and leasehold acreage located near our current operating
locations.

GREAT WESTERN ACQUISITION

Denver, CO-based Great Western Oil & Gas Co., an affiliate of


The Broe Group with active operations in the Denver-Julesburg
Basin in Colorado, has purchased 14 producing wells and 816
net leasehold acres in the Wattenberg Field from an undisclosed
seller. The private company closed on the deal January 16. The
price was not disclosed.
The acquired assets are adjacent to existing Great Western
Oil & Gas land in Weld County. While Great Western Oil & Gas
Co. doesnt appear in the OGFJ100P, the company website notes

BANKRUPTCY

Houston, TX-based Royalty Partners LLC, a privately held


company with holdings in the Eagle Ford shale play, filed for
Chapter 11 bankruptcy reorganization in the US Bankruptcy
Court Southern District of Texas in Victoria in late January.
Court filings show that, as of Jan. 27, the companys total
assets were $845,218, while its debts were more than $1.5
million. A court date has not yet been set for these proceedings.

2014 YEAR-TO-DATE PRODUCTION RANKED BY BOE


Rank

Company

BOE

Total wells

Largest field

Hilcorp Energy Co.

43,901,488

3,497

Caillou Island

Samson Investment Co.

40,451,451

3,630

Ignacio-Blanco

Chief Oil & Gas LLC

32,891,135

173

Merit Energy Co.

26,665,817

4,890

LLOG Exploration Co. LLC

25,683,087

34

Mewbourne Oil Co.

25,343,595

1,794

Pan Petro

Yates Petroleum Corp.

18,478,610

3,223

Powder River Basin Coal Bed

Endeavor Energy Resources LP

15,390,132

5,216

Spraberry

Dimock
Painter Reservoir East
Mississippi Canyon Block 0546

Citation Oil & Gas Corp.

13,920,129

2,721

Sho-Vel-Tum

10

Sheridan Production Co. LLC

13,633,239

4,113

Fuhrman-Mascho

11

Bass Companies

13,587,343

1,026

Wildcat

12

Petro-Hunt Group

13,125,049

444

Clear Creek

13

Walter Oil & Gas Corp.

12,753,653

64

Ship Shoal Block 0189

14

Slawson Exploration Co. Inc.

12,722,595

435

Big Bend

15

Fasken Oil and Ranch Ltd.

11,955,564

1,122

Spraberry

Quorum Production
Revenue Accounting

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OGFJ100P
Rank

BOE

Total wells

16

Company
Hunt Oil Co.

11,525,567

919

Largest field

17

Texas Petroleum Investment Co.

11,350,796

1,734

18

WildHorse Resources LLC

10,896,671

464

Terryville

19

Templar Energy LLC

9,917,954

825

Stiles Ranch

20

J-W Operating Co.

9,250,449

1,166

Elm Grove

21

Kaiser-Francis Oil Co.

7,504,604

1,342

SILO

22

Indigo Minerals LLC

7,357,861

724

Bethany Longstreet

23

Castex Energy Inc.

7,265,204

53

Atchafalaya Bay

24

CrownQuest Operating LLC

7,170,352

496

Spraberry

25

Valence Operating Co.

7,011,962

630

Carthage

26

Reliance Energy Inc.

6,486,411

317

Spraberry

27

Red Willow Production Co.

5,755,400

397

Ignacio-Blanco

28

Ballard Exploration Co. Inc.

5,398,982

69

Sublime West

29

Ankor Energy LLC

4,754,417

122

Ship Shoal Block 0230

30

BASA Resources Inc.

4,368,848

3,064

East Texas

31

Square Mile Energy

4,360,206

39

Glasscock

32

Vantage Energy LLC

4,354,109

230

Newark East

33

Border To Border Exploration LLC

4,189,463

83

Beech Grove

34

Jetta Operating Co. Inc.

4,006,807

410

Two Georges

35

Alta Mesa Holdings LP

4,000,183

205

Weeks Island

36

Stephens Production Co.

3,919,410

806

Gragg

37

MacPherson Oil Co.

3,872,249

487

Round Mountain

38

Burnett Oil Co. Inc.

3,809,357

386

Cedar Lake

39

Pruet Production Co.

3,648,087

226

Brooklyn

40

Summit Petroleum LLC

3,646,319

421

Spraberry

41

Tidelands Oil Production Co.

3,640,099

540

Wilmington

42

Courson Oil & Gas Inc.

3,495,445

349

Pan Petro

43

Murex Petroleum Corp.

3,470,212

202

Stanley

44

Stonegate Production Co. LLC

3,466,014

41

Eagleville

45

Renaissance Offshore LLC

3,323,042

94

Ship Shoal Block 0176

46

Berexco Inc.

3,229,684

1,587

47

DCOR LLC

3,153,255

252

Dos Cuadras

48

White Oak Energy LP

3,137,340

591

Beccero Creek

49

GeoSouthern Energy Corp.

3,121,648

127

Eagleville

50

J. Cleo Thompson & James Cleo Thompson, Jr.

3,043,914

1,145

Wolfbone

51

Petro Harvester Oil & Gas LLC

3,019,865

441

Laurel

52

CML Exploration LLC

2,979,968

275

Madisonville West

Eagleville
Golden Meadow

Burntwood Canyon

Quorum Financial Accounting / ERP

(GL, AP, AR)

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OGFJ100P
Rank

Company

BOE

Total wells

Largest field

53

Pantera Energy Co.

2,961,428

1,029

Texas Hugoton

54

Tana Exploration Co.

2,943,218

166

Timbalier Bay

55

Laredo Energy IV

2,904,296

73

Owen

56

Tellus Operating Group LLC

2,898,018

383

Baxterville

57

Murchison Oil & Gas Inc.

2,863,725

198

Triple X West

58

Texland Petroleum LP

2,829,307

696

Fullerton

59

Killam Oil Co. Ltd.

2,816,251

455

Cuba Libre

60

Venture Oil & Gas Inc. (Laurel, Mississippi)

2,768,822

112

Winchester South

61

Sanguine Gas Exploration LLC

2,743,048

142

Mills Ranch

62

Milagro Oil & Gas Inc.

2,707,973

513

Magnet Withers

63

Finley Resources Inc.

2,604,992

708

Ford West

64

E&B Natural Resources Management Corp.

2,520,685

1,151

Poso Creek

65

Aruba Petroleum Inc.

2,504,862

228

Newark East

66

New Dominion LLC

2,502,997

342

Sylvian Northeast

67

Murfin Drilling Co.

2,476,428

1,040

68

Cheyenne Petroleum Co.

2,447,338

65

69

Vess Oil Corp.

2,370,680

1,315

70

Vernon E. Faulconer Inc.

2,323,582

545

Samano

71

Wagner Oil Co.

2,277,945

459

La Sal Vieja Dist 4

72

Texas American Resources Co.

2,212,890

231

Pearsal

73

Stephens & Johnson Operating Co.

2,166,955

695

Oklahoma City

74

Enduro Resource Partners LLC

2,045,112

698

Cottonwood Creek

75

Legend Natural Gas LP

2,032,045

353

Garcias Ridge

76

Foundation Energy Co. LLC

1,839,530

1,167

77

Burk Royalty Co. Ltd.

1,825,963

273

78

Battalion Resources Holdings LLC

1,787,331

1,168

79

West Bay Exploration Co.

1,683,406

100

Napoleon

80

R. Lacy Inc.

1,669,121

255

Carthage

81

JMA Energy Co. LLC

1,639,872

184

Broxton North

82

Henry Resources LLC

1,629,486

129

University 31 West

83

Cobra Oil & Gas Corp.

1,610,081

175

Spraberry

84

Wolverine Gas and Oil Corp.

1,609,592

23

Covenant

85

Crawley Petroleum Corp.

1,575,502

443

Strong City Dist

86

Intermountain Industries Inc.

1,568,106

232

Antelope Creek

87

Sklar Exploration Co. LLC

1,552,014

78

Brooklyn

88

Inflection Energy LLC

1,546,481

17

Unknown

89

Strat Land Exploration Co.

1,498,619

326

Lipscomb

Scoda
Eagleville
Madisonville West

Silsbee
Fort Trinidad
Powder River Basin Coal Bed

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OGFJ100P
Rank

Company

BOE

Total wells

Largest field

90

Choice Exploration Inc.

1,492,141

29

Cottonwood North

91

True Oil LLC

1,489,717

194

Red Wing Creek

92

McGowan Working Partners

1,483,739

310

Shuler

93

Nearburg Producing Co.

1,465,802

192

Lea South

94

Gary, Samuel Jr. & Associates Inc.

1,459,270

227

Marceaux Island

95

Dugan Production Corp.

1,439,350

913

Basin

96

Rosewood Resources Inc.

1,430,760

1,098

97

Patriot Resources Inc.

1,424,686

70

Wolfbone

98

Black Elk Energy LLC

1,424,333

60

South Marsh Island Block 0041

99

Davis Petroleum Corp.

1,415,471

70

Lac Blanc

100

Nadel & Gussman LLC

1,385,581

379

Clyde Reynolds

Waverly

Source: IHS; For more information on the Private Company Database visit www.IHS.com
Production totals based on latest year-to-date figures as reported to and recorded by individual state agencies and tabulated by IHS at the time of publication. Some agencies are
delayed by as many as several months in releasing data which may impact company rankings.

2014 YEAR-TO-DATE PRODUCTION ALPHABETICAL LISTING


Rank
35

Company
Alta Mesa Holdings LP

BOE

City

State

Top executive officials

4,000,183

Houston

TX

Michael McCabe, VP, CFO; Mike Ellis, chair, COO; Hal Chappelle, pres, CEO

LA

Denton Copeland, pres, CEO

29

Ankor Energy LLC

4,754,417

New
Orleans

65

Aruba Petroleum Inc.

2,504,862

Plano

TX

James Poston, CEO; Jim Lovett, CFO; Ole Sandal, COO

28

Ballard Exploration Co. Inc.

5,398,982

Houston

TX

A. Ballard, pres, CEO, owner

30

BASA Resources Inc.

4,368,848

Dallas

TX

Robert Marshall, VP ops; Sandra Wallace, CFO; Lary Knowlton, co-founder, EVP;
Michael Foster, pres, co-founder

11

Bass Companies

Fort Worth

TX

Mitchell Roper, pres; W. McCreight, VP land; H. Muncy, VP exp; John


Smitherman, VP prod

78

Battalion Resources Holdings


LLC

1,787,331

Denver

CO

Keith Knapstad, pres, COO

46

Berexco Inc.

3,229,684

Wichita

KS

Adam Beren, pres, chair

98

Black Elk Energy LLC

1,424,333

Houston

TX

Larry Combs, VP ops; John Hoffman, pres, CEO; James Hagemeier, CFO

33

Border To Border Exploration


LLC

4,189,463

Austin

TX

John Gaines, CFO; Matthew Telfer, CEO

77

Burk Royalty Co. Ltd.

1,825,963

Wichita Falls

TX

Steven Stults, VP ops; David Kimbell, chair, pres, CEO; Michael Elyea, VP finance,
treas

38

Burnett Oil Co. Inc.

3,809,357

Fort Worth

TX

Philip Boschetti, VP, CFO; Anne Marion, chair, owner; William Pollaru, pres

23

Castex Energy Inc.

7,265,204

Houston

TX

John Stoika, pres

68

Cheyenne Petroleum Co.

2,447,338

Oklahoma
City

OK

Stephen Ives, pres; Tom Henthorn, VP finance

Chief Oil & Gas LLC

Dallas

TX

John Hinton, SVP, CFO; Sam Fragale, SVP ops; Logan Magruder, pres, CEO;
Trevor Rees-Jones, founder, chair

90

Choice Exploration Inc.

Arlington

TX

Jon Martin, pres; David Brooks, founder, COO, VP ops

13,587,343

32,891,135
1,492,141

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Rank

Company

BOE

City

State

Top executive officials

Houston

TX

Curtis Harrell, pres, CEO; Robert Kennedy, SVP bus dev, land; Christopher
Phelps, SVP, CFO; Steven Pearson, SVP ops

2,979,968

Kingwood

TX

William Temple, prod mgr; Lee Staiger, ops mgr; Kenneth Nelson, mgr

Cobra Oil & Gas Corp.

1,610,081

Wichita Falls

TX

Jeff Dillard, pres; Robert Osborne, VP, co-owner; Richard Haskin, CFO

Courson Oil & Gas Inc.

3,495,445

Perryton

TX

Kirk Courson, VP; Harold Courson, pres, chair, founder, owner

85

Crawley Petroleum Corp.

1,575,502

Oklahoma
City

OK

Stephen Hatfield, pres; James Crawley, chair, founder; James Drennen, VP

24

CrownQuest Operating LLC

7,170,352

Midland

TX

Robert Floyd, pres; Timothy Dunn, principal, CEO; Ken Beattie, COO, SVP;
Charles Wetzel, CFO

99

Davis Petroleum Corp.

1,415,471

Houston

TX

Thomas Hardisty, VP land, bus dev; Daniel Hawk, EVP, CFO; Michael Reddin,
pres, CEO, chair

47

DCOR LLC

3,153,255

Ventura
Dallas

CA

Jeffrey Warren, VP; William Templeton, pres, managing member, principal

95

Dugan Production Corp.

1,439,350

Farmington

NM

Thomas Dugan, pres; John Alexander, VP ops

64

E&B Natural Resources


Management Corp.

2,520,685

Bakersfield

CA

Jeff Blesener, SVP, LA basin div, midwest div; Jeff Jones, VP, eastern San Joaquin
div; Bill Moody, SVP, Gulf Coast; James Tague, SVP, finance, corp planning;
Stephen Layton, pres; Joyce Holtzclaw, VP, western San Joaquin div

Endeavor Energy Resources


LP

Midland

TX

Autry Stephens, CEO, founder, partner

74

Enduro Resource Partners


LLC

2,045,112

Fort Worth

TX

Jonny Brumley, pres, CEO, mgr; John Arms, co-founder, mgr; Kimberly Weimer,
CFO

15

Fasken Oil and Ranch Ltd.

11,955,564

Midland

TX

Norbert Dickman, VP, gen mgr

63

Finley Resources Inc.

2,604,992

Fort Worth

TX

Clinton Koerth, VP acq, land; James Finley, CEO, owner; Stephen Clark, CFO;
Brent Talbot, pres

76

Foundation Energy Co. LLC

1,839,530

Dallas

TX

John Wetzel, CFO; Eddie Rhea, CEO; Richard Payne, VP ops, eng

94

Gary, Samuel Jr. & Associates


Inc.

1,459,270

Denver

CO

Samuel Gary, pres, treas, founder; Jeff Lang, VP ops; Craig Ambler, COO,
partner; Lonnie Brock, CFO

49

GeoSouthern Energy Corp.

3,121,648

The
Woodlands

TX

George Bishop, pres, owner

82

Henry Resources LLC

1,629,486

Midland

TX

Jim Henry, CEO

Hilcorp Energy Co.

43,901,488

Houston

TX

Jeffery Hildebrand, CEO, chair; Greg Lalicker, pres; Jason Rebrook, EVP A&D;
Lee Beckelman, EVP, CFO; Greg Hoffman, VP bus dev

16

Hunt Oil Co.

11,525,567

Dallas

TX

Steve Suellentrop, pres; Thomas Cwikla, EVP exp; Paul Habenicht, EVP ops, dev;
Travis Armayor, VP corp dev; Dennis Grindinger, CFO; Jess Nunnelee, VP prod

22

Indigo Minerals LLC

7,357,861

Houston

TX

Becky Bayless, CFO, EVP; Keith Jordan, pres; William Pritchard, chair, CEO

88

Inflection Energy LLC

1,546,481

Denver

CO

Thomas Coyne, CFO; Mark Sexton, chair, CEO

86

Intermountain Industries Inc.

1,568,106

Boise

ID

Richard Hokin, chair; William Glynn, pres

50

J. Cleo Thompson & James


Cleo Thompson, Jr.

3,043,914

Dallas

TX

James Thompson, dir; Christy Thompson, dir; Linda Gordon, dir

34

Jetta Operating Co. Inc.

4,006,807

Fort Worth

TX

Gregory Bird, pres, owner; John Jarrett, VP, CFO

OK

Jeffrey McDougall, pres; Richard Bross, VP bus dev; Chad McDougall, VP

Citation Oil & Gas Corp.

52

CML Exploration LLC

83
42

13,920,129

15,390,132

81

JMA Energy Co. LLC

1,639,872

Oklahoma
City

20

J-W Operating Co.

9,250,449

Addison

TX

Tony Meyer, pres

21

Kaiser-Francis Oil Co.

7,504,604

Tulsa

OK

Henry Kleemeier, EVP, COO; Don Millican, CFO, VP; George Kaiser, pres, CEO

59

Killam Oil Co. Ltd.

2,816,251

Laredo

TX

David Killam, partner, mgr; Radcliffe Killam, CEO

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Liquid / Gas Measurement


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Rank
55

Company
Laredo Energy IV

BOE
2,904,296

City

State

Houston

Top executive officials

TX

Glenn Hart, pres, CEO; Scott Stevenson, VP acq

2,032,045

Houston

TX

Mark Holcomb, SVP, COO; Christopher Hammack, pres, CEO; John Steveson,
SVP, CFO

25,683,087

Houston

TX

Scott Gutterman, pres, CEO; Mitch Ackal, VP, bus dev; Tim Lindsey, SVP,
prod,ops; John Newman, CFO, treas; Randy Pick, managing dir, A&D

MacPherson Oil Co.

3,872,249

Santa
Monica

CA

Donald MacPherson, pres, CEO; Scott MacPherson, SVP, COO; Steve Wilson,
CFO

92

McGowan Working Partners

1,483,739

Jackson

MS

Joseph McGowan, VP; James Phyler, VP; David McGowan, partner; John
McGowan, managing general partner; David Russell, pres, CEO

Merit Energy Co.

26,665,817

Dallas

TX

Meghan Cuddihy, dir, IR; Kevin Ryan, CFO, SVP; William Gayden, pres, CEO,
chair, founder

Mewbourne Oil Co.

25,343,595

Tyler

TX

Kenneth Waits, COO, EVP; J. Roe Buckley, CFO, EVP; Curtis Mewbourne, pres,
CEO, owner

62

Milagro Oil & Gas Inc.

2,707,973

Houston

TX

Gary Mabie, pres, COO; Marshall Munsell, SVP bus dev; Robert LaRocque,
CFO, treas

57

Murchison Oil & Gas Inc.

2,863,725

Plano

TX

John Murchison, chair, CEO; Shannon Hall, CFO; JD Murchison, VP acq; R.


Tazewell Speer, pres; Michael Daugherty, EVP, COO

43

Murex Petroleum Corp.

3,470,212

Houston

TX

Waldo Ackerman, founder, pres

75

Legend Natural Gas LP

LLOG Exploration Co. LLC

37

67

Murfin Drilling Co.

2,476,428

Wichita

KS

Robert Young, CFO, sec, treas; William Murfin, chair; David Murfin, pres; Leon
Rodak, VP prod

100

Nadel & Gussman LLC

1,385,581

Tulsa

OK

Stephen Heyman, partner, LLC mgr; Wayne Hamilton, CFO; James Adelson,
pres, partner, LLC mgr

93

Nearburg Producing Co.

1,465,802

Dallas

TX

Duane Davis, COO, CFO; Charles Nearburg, pres, owner

66

New Dominion LLC

2,502,997

Tulsa

OK

Jean Antonides, VP, exp; Susan Keary, CFO; Kevin Easley, pres, CEO

53

Pantera Energy Co.

2,961,428

Amarillo

TX

Juanita Malecha, sec, treas, land mgr; William Pair, controller; Scott Herrick, VP;
Jason Herrick, pres

97

Patriot Resources Inc.

1,424,686

Midland

TX

Ben Strickling, pres; Ted Collins, CEO, chair

51

Petro Harvester Oil & Gas


LLC

3,019,865

Plano

TX

Joe Schimelpfening, COO; Dennis Justus, CFO; Gareth Roberts, chair; Scott
King, VP exp, dev; William Griffin, pres, CEO

12

Petro-Hunt Group

13,125,049

Denver

CO

Tom Nelson, VP finance; Douglas Hunt, dir acq; Charles Rigdon, VP ops; Bruce
Hunt, pres

39

Pruet Production Co.

3,648,087

Jackson

MS

J. Hilton, VP prod; Randy James, pres; Rick Calhoon, VP, sec

80

R. Lacy Inc.

1,669,121

Longview

TX

Jamey Walker, VP exp; Walt Tehan, VP ops; Kathy Maxwell, VP land; Brent Haas,
VP eng; Mike Chery, pres

27

Red Willow Production Co.

5,755,400

Ignacio

CO

Robert Voorhees, pres, COO; Bill McFie, VP ops; Stephen Goff, CFO

26

Reliance Energy Inc.

6,486,411

Midland

TX

B. Jack Reed, CFO; Gary McKinney, pres, CEO, owner; Julie Edgerton, controller

TX

Jeff Durrant, VP exp, Development; Skip Ward, VP ops; Mike Koenig, VP land,
bus dev; Jeffrey Soine, CEO; Brian Romere, CFO

45

Renaissance Offshore LLC

96

Rosewood Resources Inc.

Samson Investment Co.

61

Sanguine Gas Exploration


LLC

10

Sheridan Production Co. LLC

87

Sklar Exploration Co. LLC

14

Slawson Exploration Co. Inc.

3,323,042

Houston

1,430,760

Dallas

TX

Linda Tucker, VP admin, finance; Gary Conrad, pres; Geoff Ice, VP exp

40,451,451

Tulsa

OK

Philip Cook, EVP, CFO; Randy Limbacher, CEO

2,743,048

Tulsa

OK

Randolph Nelson, pres; Thomas Fuller, VP finance, treas

Houston

TX

Matt Assiff, EVP, CFO; Jim Bass, EVP, COO; Lisa Stewart, CEO

Shreveport

LA

Howard Sklar, owner, CEO; David Barlow, VP, COO; Chris Farrell, VP, CFO; Cory
Ezelle, VP exp

Wichita

KS

Donald Slawson, pres, CEO; Kathy Atkins, controller

13,633,239
1,552,014
12,722,595

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Rank

Company

BOE

City

State

Top executive officials

31

Square Mile Energy

4,360,206

Houston

TX

Gary Loveless, chair, CEO

73

Stephens & Johnson


Operating Co.

2,166,955

Wichita Falls

TX

Fred Stephens, pres

36

Stephens Production Co.

3,919,410

Fort Smith

AR

WR Stephens, pres, CEO

44

Stonegate Production Co.


LLC

3,466,014

Houston

TX

Ed Butler, VP, CFO; Lance Moore, VP exp; Michael Harvey, chair, CEO

89

Strat Land Exploration Co.

1,498,619

Tulsa

OK

Larry Darden, pres, CEO, owner; Russell McGhee, CFO

40

Summit Petroleum LLC

3,646,319

Midland

TX

Ryan Hamilton, VP ops, eng; Matthew Johnson, pres, COO; Mark Bruehl, VP
finance; Dennis Johnson, chair, CEO; Thomas Fago, VP exp; James Behrmann,
VP gen counsel

54

Tana Exploration Co.

2,943,218

The
Woodlands

TX

Kevin Talley, pres; Carl Comstock, VP land, bus dev

56

Tellus Operating Group LLC

2,898,018

Ridgeland

MS

Richard Mills, pres, mgr; Thomas Wofford, CFO

19

Templar Energy LLC

9,917,954

Oklahoma
City

OK

David Le Norman, CEO, founder

72

Texas American Resources


Co.

2,212,890

Austin

TX

Julian Bott, CFO; David Honeycutt, pres, CEO

17

Texas Petroleum Investment


Co.

Houston

TX

H Sallee, pres, co-founder; Wiliam Crawford, co-owner, principal

58

Texland Petroleum LP

2,829,307

Fort Worth

TX

Frank Kyle, CFO; Gregory Mendenhall, VP ops; Jerry Namy, co-owner; James
Wilkes, pres, co-owner; Bryan Lee, VP exp

41

Tidelands Oil Production Co.

3,640,099

Long Beach

CA

Don Foster, controller; Michael Domanski, pres, CEO, gen mgr; Mark Kapelke,
VP ops, eng

91

True Oil LLC

1,489,717

Casper

WY

David True, partner; Diemer True, partner; Ron Severson, treas; H. True, partner

25

Valence Operating Co.

7,011,962

Kingwood

TX

Steve Manning, pres; Douglas Scherr, CFO, sec; Walter Scherr, CEO

32

Vantage Energy LLC

4,354,109

Englewood

CO

Roger Biemans, co-founder, chair, CEO; Thomas Tyree, co-founder, pres, CFO;
Mike Kennedy, EVP, COO

60

Venture Oil & Gas Inc.


(Laurel, Mississippi)

2,768,822

Laurel

MS

Jay Fenton, pres; Jarvis Hensley, VP ops

70

Vernon E. Faulconer Inc.

2,323,582

Tyler

TX

Tom Markel, VP, acct, CFO; Vernon Faulconer, CEO; Jean Crawley, VP land,
admin; David Enright, pres

69

Vess Oil Corp.

2,370,680

Wichita

KS

Barry Hill, CEO; Ronnie Nutt, COO; J. Michael Vess, chair; Brian Gaudreau, VP
land, acq

71

Wagner Oil Co.

2,277,945

Fort Worth

TX

Bryan Wagner, pres, owner; William Lesikar, VP, CFO; HE Patterson, COO, SVP

13

Walter Oil & Gas Corp.

12,753,653

Houston

TX

Joseph Walter, pres, chair, CEO; Ron Wilson, VP; CJ Looke, VP eng

MI

Harry Graham, VP exp; Robert Tucker, pres, owner; David Rataj, VP finance, treas

11,350,796

79

West Bay Exploration Co.

1,683,406

Traverse
City

48

White Oak Energy LP

3,137,340

Houston

TX

Scott Nonhof, VP bus dev; Mark Etheredge, VP exploitation; Mike Rayburn, EVP;
Thomas Isler, pres

18

WildHorse Resources LLC

10,896,671

Houston

TX

Jay Graham, pres; Anthony Bahr, CEO

1,609,592

Grand
Rapids

MI

Gary Bleeker, VP; Sidney Jansma, pres, CEO

18,478,610

Artesia

NM

John Yates Sr. , chairman emeritus; John Yates Jr., pres, chair; John Perini, EVP,
CFO; James Brown, COO

84

Wolverine Gas and Oil Corp.

Yates Petroleum Corp.

Source: IHS; For more information about the Private Company Database, visit www.IHS.com
Production totals based on latest year-to-date figures as reported to and recorded by individual state agencies and tabulated by IHS at the time of publication. Some agencies are
delayed by as many as several months in releasing data which may impact company rankings.

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INDUSTRY BRIEFS

OPPORTUNE ACQUIRES RALPH E. DAVIS ASSOCIATES

Opportune LLP has acquired independent petroleum engineering firm Ralph E. Davis Associates LP. Established in 1924, Ralph
E. Davis performs petroleum engineering and geological studies
(both domestic and international), independently certifies
reserve reports, provides acquisition/divestiture support, and
prepares technical financial analyses for use in litigation and
regulatory hearings. Opportune will keep Ralph E. Davis Associates LP in a separate legal entity and maintain the long-established name. Allen Barron will remain President of Ralph E.
Davis Associates LP. Opportune LLP is an international energy
consulting firm. Opportunes service lines include: complex
financial reporting, corporate finance, dispute resolution, enterprise risk, outsourcing, process and technology, process
engineering, reserve engineering and geosciences, restructuring,
strategy and organization, and tax.
FRANKS INTERNATIONAL TO ACQUIRE
TIMCO SERVICES

Franks International NV, through its Texas-based indirect wholly-owned subsidiary Franks International LLC, has entered into
a definitive purchase agreement for the purchase of Timco
Services Inc., a privately-held provider of tubular running services and rental equipment onshore in the southern US and
offshore in the Gulf of Mexico. According to the 8-K filing, the
deal is expected to have a purchase price of $75 million at close,
with up to $20 million in an earnout dependent on market
conditions. The earnout is payable in two separate payments
of $10 million, each of which are contingent on the US land
rotary rig count, as reported by Baker Hughes, exceeding certain
targets over prescribed time periods during the period from
the fourth quarter of 2015 through the second quarter of 2017.
In addition, Franks LLC has agreed to make a tax reimbursement
payment of $8 million to the sellers in connection with closing
of the transaction as a reimbursement of estimated additional
tax costs to be incurred by the sellers as a result of structuring
the transaction in a manner that provides a step up in the tax
basis of Timcos assets. Mark Guidry, president of Timco, will
serve as vice president of Franks South Texas operations once
the deal has closed. Simmons & Company International acted
as financial advisor to Franks International, and Vinson & Elkins
LLP represented the company in connection with the transaction. Founders Investment Banking acted as Timcos financial
advisor, and Butler Snow LLP represented Timco in connection
with the transaction. The acquisition, expected to be financed
with cash on hand, is scheduled to close in the second quarter
of 2015, subject to regulatory approval and other customary
closing conditions.
NUTECH SIGNS ALLIANCE WITH UKOG

NUTECH, a provider of petrophysical analysis and reservoir


intelligence, has signed an alliance and consulting services
agreement with London-listed UK Oil & Gas Investments PLC
64

1504ogfj_64 64

(UKOG). NUTECH will work with UKOG to maximize the


potential value of the Horse Hill area licenses after the companys
recent Horse Hill-1 discovery in the UKs Weald Basin and assist
UKOG with its other key UK hydrocarbon assets. In 2014, prior
to the UK Landward 14th License Round, NUTECH completed
the detailed analysis of the conventional and unconventional
potential of 381 UK onshore released wells situated within key
hydrocarbon play fairways in seven basins across the UK. The
study included 133 wells in the Weald and Wessex basins, currently UKOGs prime areas of interest. As part of the alliance
agreement, UKOG will also obtain NUTECHs 2014 analyses of
key wells surrounding PEDL137 and PEDL246 licenses which
cover 140 square kilometers (34,600 acres). UKOG will also
obtain NUTECHs analyses of the Arreton-2 well, an undeveloped
potential Portland missed oil-pay discovery onshore Isle of
Wight, drilled by British Gas in 1974. The Arreton-2 well is
located within UKOGs 14th Round application area that lies
adjacent to its P1916 offshore Isle of Wight acreage. In addition
to the missed pay potential, the Company will utilize its learning
from HH-1 to investigate the hydrocarbon potential not only
within the KC Formation but also in the Osmington Oolite
limestone and Middle and Lower Jurassic hot shale sequences
in the Isle of Wight area.
SKY-FUTURES USA AWARDED EXEMPTION
TO USE DRONES FOR OIL AND GAS INSPECTIONS

Sky-Futures USA, a Houston-based company offering drone


inspection services to the oil and gas industry, was awarded a
Federal Aviation Administration (FAA) Section 333 Exemption
permitting the use of its Ascending Technologies Falcon 8 drone
in the United States National Air Space (NAS). Sky-Futures has
delivered commercial inspections to Talisman, Chevron, Conoco
Philips, Apache, and others. It now adds the USA, the biggest
potential single source marketplace for commercial drone
technology, to its global operations footprint and looks forward
to working with its substantial existing client base in the United
States of America. Heading up the team is Sky-Futures USA
vice president, business development Jason Forte (USAF retd).
Forte is a veteran armed forces pilot who has amassed over
6,500 hours flying both manned and unmanned aircraft and
served as an engineer in the Gulf of Mexico after his military
career. The business is headquartered in London with offices
in Houston TX, USA, Kuala Lumpur, Malaysia and Aberdeen in
Scotland. Sky-Futures operates around the world providing
drone inspection services and unmanned technology solutions
to its oil and gas client-base. Sky-Futures has over 8500 hours
of aviation experience, providing live flare, structural and under
deck inspections onshore and offshore.
QUICKSILVER RESOURCES FILES VOLUNTARY
CHAPTER 11 PETITIONS

Quicksilver Resources Inc. and its US subsidiaries Barnett Shale


Operating LLC, Cowtown Drilling Inc., Cowtown Gas Processing
WWW.OGFJ.COM |

OIL & GAS FINANCIAL JOURNAL

APRIL 2015

3/31/15 3:28 PM

INDUSTRY BRIEFS

LP, Cowtown Pipeline Funding Inc., Cowtown Pipeline LP,


Cowtown Pipeline Management Inc., Makarios Resources International Holdings LLC, Makarios Resources International
Inc., QPP Holdings LLC, QPP Parent LLC, Quicksilver Production
Partners GP LLC, Quicksilver Production Partners LP, and Silver
Stream Pipeline Co. LLC each filed a voluntary petition under
chapter 11 of title 11 of the US Code in the US Bankruptcy Court
for the District of Delaware. Quicksilvers Canadian subsidiaries
were not included in the chapter 11 filing and will not be subject
to the requirements of the US Bankruptcy Code. Quicksilver
Resources Canada Inc. (QRCI) has reached an agreement with
its first lien secured lenders regarding a forbearance for a period
up to and including June 16 of any default under QRCIs first
lien credit agreement arising due to the chapter 11 filing. The
company does not anticipate that US and Canadian operations
will be interrupted as a result of the chapter 11 filing. Quicksilver
has filed a series of motions with the Court to ensure the continuation of normal operations, including requesting Court
approval to continue paying employee wages and salaries and
providing employee benefits without interruption. The company
has also asked for authority to continue honoring royalty obligations, working interest obligations, and other obligations
related to oil and gas leases. The company expects that the
Court will approve these requests. During the chapter 11 process,
suppliers will be paid in full for all goods and services provided
after the filing date as required by the Bankruptcy Code. The
companys legal advisors are Akin Gump Strauss Hauer & Feld
LLP in the US and Bennett Jones in Canada. Houlihan Lokey
Capital Inc. is serving as financial advisor.
BRAZIL AWARD FOR AQUALIS OFFSHORE

Aqualis Offshore, part of Oslo-listed Aqualis ASA, has won a


contract for an FPSO project in Brazil. A 50/50 consortium
between Technip and Techint has chosen Aqualis Offshore as
marine warranty surveyor for all marine operations related to
the integration of the P-76 FPSO ( floating production storage
and offloading) unit at Techints yard in the south of Brazil.
Aqualis Offshores work scope runs until September 2016. The
P-76 FPSO unit is currently undergoing conversion from a VLCC
tanker. Once completed it will be installed at the Franco Sul
Field located in the Santos Basin pre-salt area offshore Brazil.
The FPSO is expected to produce 180,000 barrels of oil and 7
million cubic meters of gas per day.
TULLOW SECURES ADDITIONAL $450M
UNDER ITS EXISTING CREDIT FACILITIES

Tullow Oil plc and its lending banks have completed the
six-monthly reserve based lend (RBL) redetermination process,
with its asset portfolio supporting a $200 million increase in
lenders commitments, thus increasing available debt capacity
from $3.5 billion to $3.7 billion, despite lower oil prices. Tullow
and its lending banks have arranged an additional $250 million
of lenders commitments, secured through the corporate credit
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facility, which has been increased from $750 million to $1 billion.


They have agreed on an amendment to the financial covenant
on the RBL and corporate facility to address the risk of any
potential covenant breach during a period of oil price volatility
and investment in production and development assets in West
Africa. As a result, the Group has around $6.3 billion of currently
committed debt facilities with no near-term maturities.
ACORN ENERGY DEFUNDS US SEISMIC SYSTEMS

Acorn Energy, an energy technology holding company, has


stopped funding its majority-owned US Seismic Systems (USSI)
subsidiary, and USSI has suspended operations and terminated
substantially all employees. USSI intends to sell its assets and
is exploring ways to maximize value for creditors and other
stakeholders, expecting that most of the proceeds from any sale
of its assets will be used to pay creditors. It is uncertain whether
there will be any proceeds available to Acorn Energy or other
USSI shareholders. Acorn will record write-offs on its 2014 financial statements of substantially all USSI assets, including
$4.9 million of inventory, $3.4 million of goodwill and intangibles,
and $1.0 million of fixed assets.
BREITLING COMPLETES HUNTON ACQUISITION

Breitling Energy Corp. has completed the acquisition of certain


non-operated working interests in the Hunton play of northwestern Oklahoma. This phase of the acquisition includes
current production from five wells plus proportional interest
in the units held by those wells totaling approximately 3,200
acres. With this initial phase, the company also has the obligation
to purchase additional working interest in the same wells upon
completion of certain conditions related to the transaction.
The wells, primarily yielding oil and high-BTU natural gas, are
producing from the Hunton formation with multiple zones
behind the pipe, including the Woodford shale and the Mississippian limestone formation.
L.B. FOSTER ACQUIRES IOS

L.B. Foster Co. has acquired Inspection Oilfield Services (IOS),


a Houston-based company that provides nondestructive testing
and inspection services for tubular products used in critical oil
and gas applications. IOS has implemented testing and inspection technologies, as well as developed software that provides
customers with detailed information on the integrity of their
tubular assets. Inspection Oilfield Services also provides conversion services for tubular products that range from threading
of casing, refacing, and hard-banding for drill pipe, as well as
cleaning and other repair services for oil country tubular goods.
These services are often combined with IOS nondestructive
test and inspection services. IOS had 2014 sales of approximately
$120 million. IOS will operate as a wholly owned subsidiary of
L.B. Foster Co., a manufacturer, fabricator, and distributor of
products and services for the rail, construction, energy, and
utility markets, with locations in North America and Europe.
65

3/31/15 3:28 PM

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ENERGY PLAYERS

WOOD GROUP MAKES EXECUTIVE


APPOINTMENTS

Dave Stewart has been appointed CEO of Wood Group


PSN (WGPSN). He previously served as UK managing
director of WGPSNs UK operations. Stewart has more
than 38 years of oil and gas experience and has been
with Wood Group for 17 years. During this time, Stewart has been responsible for the establishment of Wood
Groups duty holder business and creating WGPSNs
industrial services capability through the acquisition
of Pyeroy Group Ltd. in 2013. Wood Group Kenny
(WGK) has appointed Bob MacDonald as CEO, effective 6 April. MacDonald previously served as WGK
regional director for the North Sea. Bob succeeds Steve
Wayman who now becomes Wood Groups head of
strategy and development. He is replacing Ali Green
who will step down from his current role but will
continue to provide support to the team as he transitions out of the business in 2015. With more than 20
years experience in the oil and gas industry, MacDonald joined WGK in 2003 having previously worked in
various subsea sector roles across Europe, the Middle
East, and North and South America. Stewart and MacDonald will report to Robin Watson who took up his
new position as COO of Wood Group in April.
LONG TO RETIRE AS SANCHEZ ENERGY CFO

Sanchez Energy Corp. executive vice president and


CFO, Michael G. Long, plans to retire from the company
effective April 30, 2015. Gleeson Van Riet, senior vice
president of capital markets and investor relations,
has been named interim co-CFO, effective immediately.
Long joined Sanchez in 2008 and contributed significantly to the formation, management, and growth of
Sanchez since its IPO in 2011, said Tony Sanchez, III,
president and CEO of Sanchez Energy. The company
has retained Spencer Stuart to assist in the process of
searching for a new CFO. Long is expected to remain
with the company until April 30 and transition his
responsibilities to Gleeson Van Riet. The company
expects that Long will provide certain on-going
post-retirement assistance as reasonably requested.
Van Riet, who joined Sanchez Oil & Gas in April 2013,
has over 20 years of financing experience and previously served as an investment banker with Credit
Suisse and Donaldson, Lufkin & Jenrette.

served as senior vice president and CFO. He previously


served as senior vice president and CFO for McDermott
International Inc., and also for The Babcock and Wilcox
Co. following its spin-off from McDermott. Taff also
has held finance leadership roles at HMT Inc., Philip
Services Corp., and British Petroleum Oil Co. spent
nine years at Price Waterhouse. He holds a BBA in
accounting from Stephen F. Austin State University,
and is a certified public accountant.

Stewart

DRILLINGINFO APPOINTS ROMERO


TO EXECUTIVE LEADERSHIP TEAM

Drillinginfo, a SaaS and data analytics company for


energy exploration decision support, has appointed
Jairo Romero as chief revenue officer and executive
vice president. He will lead the companys global sales
organization, including global support and global
membership development. Romero spent the last 12
years at Rackspace, holding senior leadership roles
across geographies, including the Americas, Europe,
Africa and the Middle East. Most recently, he served
as vice president and general manager at Rackspace.
Romero will be based out of Drillinginfos Austin headquarters. He holds a BBA from Texas Lutheran University and a Master of Business Administration from
The University of Texas at San Antonio. He sits on the
board of regents at Texas Lutheran University.

MacDonald

Romero

LILIS ENERGY NAMES NANKE AS CFO

Kevin Nanke has joined Lilis Energy as its executive


vice president and CFO. Nanke has served in diverse
finance and accounting executive positions in the oil
and gas industry for more than 25 years. Eric Ulwelling,
who served as Lilis Energys CFO since October 2014,
has resumed his position as principal accounting officer and controller, a post he has held since joining
the company in 2012. Nanke previously served as
treasurer and CFO of Delta Petroleum Corp. from 1999
to 2012, and as its controller from 1995 to 1999. Concurrent to his positions, Nanke served as treasurer and
CFO of Deltas E&P subsidiary, Amber Resources, and
as treasurer, CFO, and director of Deltas E&P subsidiary, DHS Drilling Co. Prior to joining Delta, Nanke
was employed by KPMG LLP. Nanke received a bachelors degree in accounting from the University of
Northern Iowa in 1989 and is a certified public accounting (inactive).

CB&I APPOINTS TAFF AS CFO

CB&I has appointed Michael S. Taff as executive vice


president and CFO, effective April 1. Taff will succeed
Ronald A. Ballschmiede, who is retiring. Taff has more
than 30 years of financial and global industry experience. He joins CB&I from Flowserve Corp., where he
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TAMARIND APPOINTS ASTON VICE CHAIRMAN

Tamarind Energy, a Kuala Lumpur-based E&P company formed with a commitment from Blackstone
Energy Partners in 2014, has appointed Ron Aston as
vice chairman. Aston recently retired from Talisman
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3/31/15 3:28 PM

ENERGY PLAYERS

Mendez

Lewis

Energy, where he acted as senior vice president and


country manager of Malaysia. He has held senior financial and general management roles with operators
in Malaysia, Indonesia, and Myanmar, including Conoco, Cities Service, Elf Aquitaine (Total), and Premier
Oil. Aston has also acted as president of the Indonesia
Petroleum Association. Aston holds a degree in economics and politics from the University of Leeds, and
is also a graduate of the Advanced Management Program at INSEAD, Fontainbleau, in France. He is a
chartered accountant and a distinguished member of
the Institute of Chartered Accountants England &
Wales (ICEAW).
DUNN SUCCEEDS BRADLEY IN QUESTAR
EVP, PRESIDENT ROLES

Allan Bradley, who serves as executive vice president of Questar Corp. and as president and CEO of
Questar Pipeline, has elected to retire, effective June
1. Micheal Dunn will become the executive vice
president of Questar Corp. and president of Questar
Pipeline, effective April 16. Bradley has led Questars
interstate pipeline subsidiary since 2005, after 30
years with other energy companies. Dunn comes to
Questar after serving since 2010 as president and
CEO of PacifiCorp Energy, a subsidiary of Berkshire
Hathaway Energy. Prior to that, Dunn was president
of Kern River Gas Transmission Co., Berkshire
Hathaway Energys interstate pipeline subsidiary.
He graduated in 1988 from the University of
Oklahoma with a bachelors degree in civil engineering. In addition to these changes, Craig Wagstaff,
Questar executive vice president and COO of
Questar Gas Co., has been named executive vice
president of Questar and president of Questar Gas
Co.
MAYER BROWN ADDS ENERGY PARTNER

Francisco Mendez has joined Mayer Brown as a partner in the firms global energy practice. Previously,
Mendez spent nearly 20 years at ExxonMobil as inhouse counsel for Latin America, where he most recently advised the company on the opening of the oil
and gas industry in Mexico to the private sector. He
was also involved in the formation of the Mexican
Hydrocarbons Association, the first such industry
association in Mexico. He will be based in the Houston
office. Subject to Mexican legal and regulatory requirements, If approved, Mayer Brown intends to open a
representative office in Mexico City. In addition to
Mexico, Mendez has experience in handling oil, gas
and power matters in Argentina, Chile, Brazil, Uruguay,
Peru, Colombia, Ecuador, Venezuela and Guyana. He
68

1504ogfj_68 68

is licensed to practice law in Mexico and graduated


from Panamerican Universitys School of Law (Universidad Panamericana) in Mexico City.
SIDLEY AUSTIN ADDS CORPORATE
GOVERNANCE, M&A PARTNER IN HOUSTON

Sidley Austin LLP has added Kevin P. Lewis to the


firms Houston office. Lewis will be a co-leader of the
firms corporate governance practice for the Southwest
region, the leader of the firms Aviation and Airlines
practice, and a member of the firms global M&A practice. At his prior firm, Lewis was a member of the
mergers, acquisitions and capital markets group and
led its corporate governance and compliance group,
as well as its airlines and aviation practice. Lewis
regularly represents oil and gas exploration and production companies, oilfield service companies, major
airlines, investment banks, private equity funds and
their portfolio companies. He has significant experience handling complex M&A transactions, structured
financings and capital markets financings, including
initial public offerings and 144A offerings of securities.
Lewis also advises public company boards of directors
and various corporate committees, including special
committees and committees of independent directors
in connection with compliance and governance matters. Lewis serves as an adjunct professor at the University of Houston Law Center, where he teaches an
ethics class focused on practical issues affecting courtroom and boardroom-related decisions.
BAKER BOTTS NAMES ENERGY PARTNER
TO HEAD LONDON OFFICE

Baker Botts had appointed Mark Rowley as the partner


in charge of the firms London office. Rowley replaces
Steve Wardlaw who is leaving the firm to pursue other
business interests outside the legal field. Rowleys
practice focuses on advising clients on the development of energy projects, with a particular focus on
upstream oil and gas developments, and liquefied
natural gas (LNG) and cross-border pipeline projects.
Rowley joined Baker Botts in London in 2001, and was
then based in, and head of, the firms office in Baku,
Azerbaijan from 2003 to 2005. In January 2010, Rowley
moved to Australia to become general counsel of Australia Pacific LNG (APLNG) in Brisbane, before rejoining the firm in October 2011. Wardlaw was the first
English qualified associate to join the firm, in January
of 2000, and has been the partner in charge of the
London office since September of 2012. Prior to that,
he was partner in charge of the firms Moscow office
for seven years.
WWW.OGFJ.COM |

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APRIL 2015

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ENERGY PLAYERS

PURPLE LAND MANAGEMENT PROMOTES MCINTYRE

Purple Land Management (PLM), an energy services company


headquartered in Fort Worth, Texas, has promoted Nathan
McIntyre to vice president of land and technical operations. In
his new role, McIntyre will manage companywide information
systems. McIntyre will continue to serve at PLMs Canton, Ohio,
location one of the companys 11 offices located throughout
the US. Since joining the Purple team as geographic information
systems (GIS) manager in 2011, McIntyre has led GIS procedures
that deliver strategic solutions for clients, and has helped advance the companys GIS Overdrive system. As vice president
of land and technical operations, McIntyre will be responsible
for GIS strategy and development, title plant and operations
applications, and software systems analysis and
programming.
HELIX TO MAKE MANAGEMENT CHANGES

Helix Energy Solutions Group Inc. says that, effective May 11,
Cliff Chamblee will retire after 36 years in the offshore services
business and will resign as executive vice president and COO.
Also effective May 11, Scotty Sparks will be promoted to the
position of executive vice president of operations. Sparks has
25 years of industry experience and has been with Helix since
2001. He currently holds the office of vice president of commercial and strategic development, and has also served in various
positions within Helixs robotics subsidiary, including as senior
vice president, during his tenure at Helix. Prior to that, Sparks
held various positions within the industry, including as operations manager at Global Marine Systems. Helix Energy Solutions
Group, headquartered in Houston, Texas, is an international
offshore energy company that provides specialty services to
the offshore energy industry, with a focus on well intervention
and robotics operations.

for Stophlet & Associates, vice president for Mullen Crane and
Transport, COO for the US Energy Development Corp., and
executive consultant for Baker Hughes. Stophlet has also held
multiple positions at Schlumberger. He received his Bachelor
of Science degree in geology at the University of Arkansas.
PARKER DRILLING ELECTS SELIM TO BOARD

Parker Drilling has elected Zaki Selim to the companys board


of directors. He will serve on the boards audit committee. With
the addition of Selim, the boards total membership is now 10.
Selim retired after a 29-year career with Schlumberger. Prior to
his retirement in 2010, he served for four years as president of
oilfield services for Schlumbergers Middle East and Asia operations. In this role, Selim oversaw every aspect of the regions
business development, marketing, and operational execution
activities. Since retiring, Selim has been involved in oil and gas
investment and consulting advisory services. Selim holds a
bachelors degree in mechanical engineering from Cairo Universitys Faculty of Engineering and attended the management
program at Harvard Business School.





BRUNNER DEPARTS SANCHEZ PRODUCTION PARTNERS

Stephen R. Brunner, president and CEO of Sanchez Production


Partners LP, left the partnership, effective March 11. Tony
Sanchez III, co-president of Sanchez Oil & Gas Corp. and a
director on the board of directors of SPPs general partner, SP
Holdings LLC, said, We are not announcing a new CEO for SPP
at this time. We will, instead, leverage the operating and management capabilities of the general partner in the day-to-day
management of SPP, with an eye toward actively working to
further minimize the partnerships G&A costs over time.
US SHALE SOLUTIONS APPOINTS
STOPHLET TO LEAD OPERATIONS

US Shale Solutions Inc. has added Mike Stophlet to its senior


leadership team. An energy industry veteran with nearly 30
years of experience, Stophlet joins the company as executive
vice president of operations. Previous to US Shale, Stophlet held
various leadership roles at national and international companies
including president and CEO for ASRC Energy Services, CEO
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advertisement

MEXICO
BOLD PIONEERS OF THE NEW ENERGY FUTURE

fter decades of holding a monopoly on both exploration and production in


Mexico, Pemex, the countrys NOC, will be just one of many companies bidding for blocks, thanks to the countrys energy reforms bill formally becoming
law on December 21st, 2013. Fifteen months later, and despite oil prices dropping to
less than USD 50 per barrel, Mexico decided that it would still press on with its historic
auction of offshore blocks. The plunge in the price of oil is not negatively affecting the
global interest in Mexicos energy industry opening, since we have production and
development costs that are far below the price of oil, at USD 22 per barrel, explains
Emilio Lozoya Austin, CEO of Pemex. This makes Mexico a very attractive location to
invest in. On December 12th 2014, Mexicos energy sector took a major first step
towards private investment when it opened bidding on 14 shallow water exploration
and production contracts, covering 4,222km2 in Mexican territorial waters.

THIS SPONSORED SUPPLEMENT WAS


PRODUCED BY FOCUS REPORTS.
Publisher: Ines Nandin
Coordinator: Alina Cotfasa
Contributions: Mariuca Georgescu & Angelo Basurto.
Photo Courtesy: Manuela D`Andrea
For exclusive interviews and more info, plus log onto
energyboardroom.com or write to contact@focusreports.net

APRIL 2015

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71

3/31/15 3:28 PM

However, while the exuberance currently electrifying the Mexican oil

es that, in some cases, will

and gas sector is perhaps justified given developments over the last

have a mix of technologi-

year, these new companies would do well to remember that a brave

cal, financial and experi-

new world is dawning in Mexico, and the expertise of the old guard may

ential advantages over us.

not prepare companies sufficiently for new frontiers a lesson that can

I see this as a challenge,

be learnt from OGX in Brazil, among others.

but also as a great opportunity that we should le-

DEMOCRATIZING THE ENERGY REFORMS

Emilio Lozoya
Austin,CEO,
PEMEX

verage to the fullest.

In recent decades, Mexico has done little to bust the monopolies and

Despite

these

chal-

oligopolies that stunt the countrys growth. The states control of the

lenges, it is evident that

energy sector, as well as private monopolies in other strategic sectors

Mexican businesses are

including telecommunications, have translated into increased basic

determined to rise to the challenge and are viewing the reforms more

costs for Mexicans by some 40 percent according to OECD estimates,

as an opportunity for growth, rather than a competitive threat. Jos

although, as Lozoya points out, Pemexs efforts end up building one

Juan Altonar Reyes, director general of Altopetrum & General Oil de

out of every three schools, one out of every three hospitals, one out of

Mxico, a domestic SME specialized in the provision of products and

every three kilometers of roads that are built. Indeed, with the opening

services in the area of solids and fluids control for the oil industry, shares

up of the energy sector, the Pea Nieto administration has taken bold

his views about the opening up of the industry to international partici-

steps to act on the mandate for change that was handed to it in the last

pation. I most certainly view the reforms with great optimism. They

presidential election, and has made significant progress to dismantle

represent a fantastic opportunity to develop our business into a stron-

these concentrations of economic power. Leveling the economic play-

ger and more sustainable company.

ing field will undoubtedly help to boost Mexicos development, particu-

Altonar goes on to explain how the liberalization of Mexicos energy

larly that of small and medium-sized enterprises, the job creators in

sector will enable Mexican businesses like his to interact with interna-

most economies.

tional businesses, thereby exposing them to new ideas, ways of operat-

Some, however, have pointed out that at face value, it is big business

ing and doing business. SMEs in particular, like Altopetrum, have a lot

that is far better positioned to benefit from the opening of the Mexican

to gain, insists Altonar. The reforms will incentivize us to develop the

oil industry as a result of the size of the required investment. The re-

scope and capabilities of our businesses, effectively unlocking addition-

forms represent a huge challenge for smaller and medium-sized Mexi-

al opportunities for us as we evolve.

can companies, says Alejandro Fuentes Alvarado, director general of

Although large companies in Mexico have experienced a compound

Detectores y Controladores Del Golfo S.A. de C.V. (DYCGSA). Domes-

annual growth rate (CAGR) in dollar terms of 14 percent since 1993, the

tic businesses will be expected to compete with international business-

country has experienced mediocre growth in relationship to peer countries like Brazil over the same time period. However, after a rough 2014
plagued by high inflation, economists
expect a gloomy year for Brazil, whose
GDP is forecasted to shrink by 0.5 percent in 2015. In contrast, Mexico had a
2.1 percent GDP increase in 2014, forecasted to pick up to an encouraging
annual average of 3.7 percent in 201519. Research suggests that these differences in performance are attributable
to entrepreneurship and the growth of
small and medium enterprises (SMEs).
In the past, a handful of companies
dominated the sector in its entirety,
explains Altonar.
The energy reforms and new regulations effectively allow for a larger market in terms of investors and invest-

72

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ENERGYBOARDROOM.COM

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APRIL 2015

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WHAT IS LOZOYA LOOKING FOR?

olding degrees in economics and law and a Masters in public administra-

The oil industry needs to look at very long-term goals. Investment cycles

tion and international development from Harvard, Emilio Lozoya Austin

in deep water are more than ten years, to recover the cost. In other types of

became the CEO of Pemex after heading the international affairs office for

reservoirs we might have longer or shorter term horizons.

Pea Nieto during his campaign, and leading his transition team. He speaks to

But Pemex, considering that we have one single owner which is the State,

EnergyBoardroom about what Pemex is looking for from future international

has very long-term goals and very long-term investment cycles, and this is ben-

partners for the full interview, log onto EnergyBoardroom.com.

eficial for our current and our potential partners.

Q: Beginning in 2015, Pemex is set to ink its first joint ventures with private

resources of the areas we have the highest expertise. We will be focusing in the

and foreign oil companies. Generally speaking, what characteristics and at-

areas we have successfully been developing, but also have the opportunity to

tributes will Pemex seek in its partners as the company makes one of the

add joint ventures with other international oil companies to complement our

first major action steps in its energy reform?

investments.

A: International oil companies and medium-sized oil companies across the

serves to ensure sustainability in the medium and long-term, while giving the

world are very eager to work with us, because we are a leading global player,

market sufficient resources to develop through the private sector. We need

particularly in shallow waters. In deep water we have evolved technologically,

to assure our companys growth and our place as a leader in the oil and gas

and have a current success rate above 50 percent.

industry in Mexico.

With Round Zero we requested to retain exclusive rights to prospective oil

In the end, our goal is to allow Petroleos Mexicanos to have enough re-

ment

levels.

Increased

exercised its strong influence over the national company; training and new comers were few and

spending across the entire

far in between. Over time, Pemex was drained of its experienced people and had many of its key

value chain will translate into

positions taken up by inexperienced individuals, despite their best intentions.

countless opportunities for

However, Aparicio goes on to explain that what we see today is a growing pool of newer

domestic and foreign busi-

generations that have both the skills and the eagerness to transform Pemex into a nimble 21st

nesses, small and large. It

century oil company. So long as there is a shift in mentality and in the outdated

Jos Juan

also translates into cash for Altonar Reyes,


General Director,
state coffers. Overall, as a
Altopetrum &
result of the energy reform, General Oil de
Mexico

business-as-usual ways, I am confident that the newer generations at the helm


of Pemex can and will bring about real change.
Pemex is conveying a message of transformation that is consistent with the

Mexico expects to attract

principles of the energy reform, says Arindam Bhattacharya, Schlumbergers

more than USD 50 billion in new private and

president for Mexico and Central America. Indeed, international partners look-

foreign investment by 2018, including about

ing to take advantage of the opportunities in Mexico should listen to these Bhattacharya,
messages carefully. Pemex, and the E&P industry as a whole, is communicating President

USD 32 billion via the new partnerships with

Arindam

Mexico &

outside companies, Lozoya explains.

its desire for international participation and investment. Instead of being ap- Central America,
Schlumberger
prehensive of international competition, Mexico welcomes it.

FROM AN ENERGY REFORM


TO A MINDSET REFORM
After nearly eight decades of strict national
control, with Pemex at the top of the pyramid,
Mexican businesses will need to transform
their mindset to adapt to the new energy re-

AN IPO AMIDST THE REFORMS


C.I.C.S.A - CORPORATIVO INDUSTRIAL Y COMERCIAL S.A DE C.V

We began the process of analysis and evaluation to become a public company in June 2012, when
the energy reforms were just a good idea, far from the reality that it is today, explains Andrs Garca

Castillo, CEO of C.I.C.S.A, a company specialized in cranes for the offshore segment. He believes the
energy reforms will provide solid growth to his company, based on the fact that the potential pool of

forms, which will entail a brand new way of

clients which we can offer our services is sure to expand, thereby increasing our long term commercial

doing business, a new set of standards when

opportunities and overall business sustainability.

it comes to competitiveness, a new set of

Do such listings mark a shift in the way that Mexican offshore service companies will do business,
now there will be more than just Pemex as a client? There were several objectives to listing the com-

partners to diversify away from Pemex, and a

pany, Garca explains. As well as giving us better access to financing, preparing for the listing also

new set of challenges for both Mexican and

allowed us to institutionalize and better define process and access to quality information. The shift to

international companies. Business-as-usual in

corporate governance will help us develop and grow in the long term. We believe that everyonefrom
partners and customers to suppliers, financial institutions and our own employeeswill benefit from a

Mexico is changing fast.

company that operates in a more transparent manner.

Jos Miguel Aparicio Ferrer, CEO of Ca-

According to Garca, listing on the Mexican exchange by local businesses is limited, with less than

termar de Mexico, agrees. Change starts at

150 companies listed. In fact, C.I.C.S.A will be the first company based in the state of Campeche to

home and from within and for us Mexicans,

be listed on the local market. Nevertheless, the relative underdevelopment and lack of experience in

Pemex is home. Fortunately, newer generations of businessmen and leaders are heading

the listing market will cause us to incur generally higher costs, with restricted consulting and advisory
resources that are more likely than not unsuitable for our specific needs. If more Mexican companies in
the oil and gas industry wish to list, they may well have to face the same challenges.

the state giant. For many years, as the union


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BEYOND INCREASED PRODUCTION

2014. As Primo Luis Velasco Paz, sub-director

Although one of the primary aims of the energy reforms is to reverse Pemexs

of distribution and marketing at Pemex and

stubborn decline in production, from 3.5 MMb/d a decade ago to approximately

executive president of the Congress, puts it,

2.4 MMb/d today, the NOC has the chance today to enhance investment effi-

we intend to convey to both Pemex and busi-

ciency and operational productivity across the entire value chain by introducing

nesses operating in that domain that we have

higher levels of competitive forces.

hit the ground running and are prepared to

For instance, earlier in 2014, Pemex was forced to cut production forecasts to Primo Luis

make the necessary changes and investments

2.35 MMb/d by the end of 2014 after it was revealed that aging production sys- Velasco Paz,SubDirector of
tems were counting some water as oil. This was unwelcome news for the NOC,
Distribution
as it had already cut its output target earlier in the year, forecasting that produc- and Marketing,
PEMEX

tion would fall to 2.4 MMb/d at 2014 by year-end after appearing to stabilize for

to enhance our measurement accuracy and effectiveness made possible by the recently-introduced secondary laws.
Furthermore, he goes on to explain that Pe-

a number of months at around 2.5 MMb/d. In response to these issues, Pemex sought to discover

mex is looking to promote greater techno-

the best international technologies and practices to measure hydrocarbon flow and quality by or-

logical exchange among all businesses and at-

ganizing its first ever Exhibition on Hydrocarbon Flow and Quality Measurement in November

tendees,

in

addition

to

Pemexs

own

employees, in order to raise awareness about

Fig. 1: DISTRIBUTION OF MEXICO PROSPECTIVE RESOURCES


(THOUSAND OF MILLIONS OF BARRELS OF CRUDE OIL EQUIVALENT)

the latest technologies and solutions. The topic of measurements and their implementation
in Mexico is taking on an even greater impor-

Non associated Gas


Oil and Associated Gas
Deep Waters

US

tance in the domestic industry, particularly as a


result of the energy reforms. Mexicos congress
has made clear their objective to intensify technological exchange in the industry and this is

Burgos

Sabinas

precisely what the exhibition was about.


Alejandro Fuentes Alvarado, director

MEXICO

Plataforma de
Yucatan

Tampico
Prospective Resouces

general of DYCGSA, a Mexican company

Deep Waters

dedicated to the implementation of instrumented safety systems and measurement of

mmmbcboe

Sabinas
Burgos
Tampico- Misantla
Veracruz
Southeast ( Sureste)
Deep Waters of Gulf of Mexico
Yucatan Platform

0.4
2.9
2.5
1.6
20.1
26.5
0.5

Total

54.5

hydrocarbons and attendee of the congress,

Misantla

shares Velascos views. Measurement is a


Veracruz

very important area within the universe of

Cuencas del
Sureste

the oil and gas business and this reform is


bringing more and more projects each day,
explains Fuentes. In turn, this automatically

Source: Secretary of Energy, Crude Oil Prospect 2012-2016

translates into new business for our country.


Businesses like DYGCSA must exert a con-

Fig. 2: PEMEX RESERVE REPLACEMENT RATIO


Reserve replacement
ratio

stant effort and do their part to ensure that


140%
120%
100%
80%
60%
40%
20%
0

128.7%
103.9%

102.1%
65.7%

56.9 % 59.2% 59.7%

22.7% 26.4%

41.0%

50.3%

71.8%

77.1%

85.8%

107.6%

128.0%

The reserves
replacement
ratio has
been above
100 % for
2 years in
a row.

101.1% 104.3%

2005 2006 2007 2008 2009 2010 2011 2012 2013


PEMEX Investment in Exploration
2.5
Billion U$
2.4
2.3
2.2
2.0
1.5
1.4
1.3

the countrys infrastructure and operations


are safe and efficient. The energy business
model as we know it is based on the extraction and commercialization of oil and, to
make that happen, previous measurements
and calculations must be done and this is

2.6

where we enter the picture. To put it bluntly,


the more multinational companies want to
enter the Mexican market, the more measurement must be done.

2005

2006

2007

2008

2009

2010

2011

2012

2013

Fuentes explains that Pemex is investing

Source: PEMEX

more in measurements each day as production decreases. They need to become more

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efficient at the extraction process to calculate everything carefully before

duce costs by reducing consumption as well as main-

doing any drilling begins. DYGCSA helps them to become more produc-

tenance costs. With the enactment of the energy re-

tive in this regard and thus more profitable.

forms, Mexico has made a meaningful shift towards

Another area that the energy reform was created to address is en-

more environmentally conscious solutions for the ex-

ergy sustainability and efficiency. As a Mexican company dedicated to


providing integrated power generation solutions specifically to the oil
and gas industry through the use of cutting-edge technology, Industrias Energticas welcomes the energy reforms with open arms. The
company is a recognized distributor for Capstone Turbine Corporation, the worlds leading producer of low-emission MicroTurbine sys-

traction and consumption of energy, declares


Juan Carlos
Hernandez
Najera, General
Director,
Industrias
Energeticas

Hernndez.
In reference to a slew of energy sustainability regulations and funds introduced by the energy transition package, which contains laws promoting sustainability, Hernndez is optimistic about Mexicos

tems, and offers clients advanced power solutions associated with the

environmental footprint. We are excited about the new regulations

high levels of efficiency and ultra-low emissions.

introduced by the energy reforms which seek to promote cleaner and

Although there is burgeoning global demand for such innovative

greener practices, affirms Hernndez. The environmentally friendly

green products, for Juan Carlos Hernndez Njera, director general of

legislation will finally put an end to the diesel-spilling culture that pre-

Industrias Energticas, introducing these greener and more efficient

vailed in the past when companies opted, for example, use the cheap-

technologies to Mexico has not always been smooth sailing. One of

est equipment which often was extremely polluting and wasteful.

our key challenges was convincing clients to use our products since
they were more on the premium side of power generation solutions

FREE ADVICE / PARTNERSHIP IS KEY

and the regulations to promote the use of cleaner sources of power

With a rich professional background in the international exploration

were lacking, says Hernndez. Of course, we put a lot of effort into

business, Jos Miguel Aparicio Ferrer, CEO of Catermar de Mexico, an

educating prospective clients not only of the environmental benefits of

industrial catering and hospitality services company specialized in the

Capstone MicroTurbines, but also of their capacity to significantly re-

oil industry, offers investors eager to participate in Mexicos emerging

D E T E C T, A N A LY Z E , M E A S U R E
AND MONITOR

EPC projects for the oil industry Pipeline Hot Tapping & Cleaning Development and integration of
burner gas measuring systems using ultrasonic technology Design and integration of safety system
Supply of retrofittings Measurement operations support for process centers

Detectores y Controladores del Golfo S.A. de C.V.


Avenida Edzna S/N between Avenida Central y Abasolo Col.Parque Industrial, Ciudad del Carmen, Campeche
(938) 118 15 69 (938) 118 15 70
afuentes@dycsa.com.mx juangabriel.rodriguez@dycgsa.com.mx vganboa@dycgsa.com.mx

www.dycgsa.com.mx

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opportunities a simple piece of advice. In the same way that travelers


to new destinations first seek to sample the local foods and visit the
cultural centers of the host country to see it for what it is, investors
should seek to reform partnerships with established local businesses.
Working directly with Mexicans is undoubtedly the best way of ensuring that investors become a part of the countrys historic energy
reforms.
Surely, investors should not take this advice lightly. In the past, Catermar de Mexico has successfully acted as the legal representative of
several drilling companies, including most importantly Pride International for which Aparicio was the legal representative and commercial
manager for about a decade while simultaneously heading his catering
business. During that time, Aparicio successfully contracted Pride rigs
to Pemex that generated USD 1.1 billion of revenues over that period
of time. Now more than ever, Aparicio states, for those international players looking to be a part of the Mexican energy reforms, its
rather simple; work with Mexicans!
When asked about the biggest obstacles facing
international investors looking to penetrate the Mexican oil industry, Yann Kirsch, executive vice president
of business development at Goimar, suggests that
its perhaps the cross-cultural differences and lanYann Kirsch,
EVP Business
Development
Goimar

guage barriers that are toughest to overcome. Part


of the Goimar-Goimsa Group, Goimar is an organization dedicated to the leasing and operation of drilling
rigs and marine vessels to the oil and merchant sec-

tors which attributes a lot of its success to the wealth of experience in


partnering with international players.
Goimars operational seed, explains Kirsch, stems from 2002
when we were responsible for operating a semi-submersible drilling rig

UPPING THE GAME

s the reforms are well into their implementation phase and the industry prepares itself for
the wave of international investment and participation, many businesses are looking to professionalize
their organization. One way in which they are doing
so is by gaining internationally recognized certifications that would enable them to meet the requirements of international businesses.
Jos Miguel
A prime example of these is Catermar de MexAparicio,CEO
ico, a Mexican company founded in 1993, with the
Catermar de
purpose of providing world-class industrial catering
Mexico
and hospitality services to the terrestrial and maritime facilities of the Mexican oil industry.
With over two decades of experience under their belt, Jos Miguel
Aparicio Ferrer, CEO of Catermar de Mexico, explains that, since the
very beginning, we have been keen to building Catermar into a company capable of competing in the international arena. As a consequence,
we are the first Mexican company to in our field to earn ISO 9000 certification for quality management systems as early as 1998. Over the
years, our ambitions continued to be strengthened by improving installations, training and the services we offer to clients. In fact, we are
currently in the final stages of having integral certification that would
include ISO 14000 certification which addresses various aspects of environmental management, as well as OHSAS 18000 occupational health
and safety certification the ISO 22000 standards which addresses innocuity of food. These standards will all be integrated into our ISO 9000
certification to demonstrate our commitment to quality throughout the
organization.
Having embarked on a mission to professionalize Catermar and
gain international accreditation some two years ago, we are ecstatic
to have successfully reached our goal, revels Aparicio. When we first
started that process, many around us scoffed at our ambitions and
never saw the long term benefit. Today, we know that Pemex will soon
start mandate that its suppliers in our field have these very same certifications, giving us at least a couple of years head start over those that
chose not to invest in the development of their business. Sure, we have
had to sacrifice a good proportion of our profits, but this was done in
lieu of being there first.

owned by Sinopec, which was then managed by Maersk contractors.


We worked in close collaboration with Maersk on operating that drilling rig, and represented only the start of many strategic alliances with

ter navigate the unique characteristics of a given countrys economic,

international organizations to offer a variety of offshore drilling servic-

financial, legal and political systems, among others.

es. Since then, Goimar has successfully partnered with a variety of


leading international players including one of Asias largest marine

PRE-REFORM INNOVATION DONE RIGHT

companies - Pacific Richfield Marine, China Oilfield Services (COSL),

Before the energy reforms became a reality in Mexico,

Colombian-based Coremar and CROSCO from Croatia, among many

Pemex was already starting to experiment with differ-

others.

ent ways to break out of its traditional business lines

We gained a lot from those experiences, boasts Kirsch, which

and try to explore new opportunities within the con-

have allowed them to overcome the intercultural barriers to partnering

straints of laws that governed it. One of the fruits born

with international players. We have managed to eliminate these bar-

from this activity was Comesa: initially created to pro-

riers and introduce Pemex to different kinds of companies from around

vide Pemex with cutting-edge seismic acquisition Urdaneta,

the world to service their needs and target various international ten-

technology, Comesa is a majority state-owned busi-

ders or projects in the market place.


Kirsch goes on to add that, in many ways, we like to think of our-

Gustavo

Director of
Operational
ness, but has proven much more agile than its parent Services,
company, which has left it able to rapidly capitalize on COMESA

selves as that bridge connecting Mexico and Pemex to the global

market insight and opportunities available. For example, by 2007,

arena. Most often, the best strategy for any company to enter a new

Comesa had expanded its capabilities from an exclusively onshore com-

market is through local partnerships. Doing so allows investors to bet-

pany to providing offshore exploration services in both shallow and

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deepwater plays; by 2012, the company had moved


into a fully-fledged production company too.
For Gustavo Urdaneta, Director of Operational
Services at Comesa, it was clear that the energy reform was a necessary step for the Mexican oil and gas
sector. It was rather obvious that Mexico needed the Jorge Luis
participation of private companies, he says. Our Gonzlez

Velzquez,

country did not have enough money to invest in the General Director,
oil industry and in the development of new fields. Pe- GAID
mex required a lot of help in technically difficult and
complex areas, such as in the Gulfs deepwaters for instance. I can see
that companies all around the world have their eyes on Mexico. He is
hopeful that the reforms will mean positive developments for Comesa.
The conditions are ripe for a transparent relationship between us and
multinationals. The rules of the game are clear and the stage is being
set for a greater production of crude oil.
Although it might seem today as if the pre-reform Pemex had been
languishing in the dark ages when it came to innovation, there are great
examples to be found of the NOC leading the way. Jorge Luis Gonzlez
Velzquez, the brain behind Grupo de Analasis de Integridad de Ductos
(GAID), is credited with raising global industry standards thanks to a
project run together with Pemex for improving pipeline lifecycles.
Metallurgy has always been of great interest to me, Gonzlez explains, which ultimately led him to improve Pemexs oil and gas pipelines, which often corrode and crack due to the high levels of sulfur in
Mexican crude. The mathematical algorithms developed by GAID allow
for precise calculation of the remaining strength and life of pipelines,
which has allowed Pemex to save money and work more efficiently on
maintenance in the years since it was introduced as a standard test.
Gonzlezs novel model became a landmark in the relationship between academia and industry in Mexico, because the scientific methodology came to be regarded as a discipline now called integrity assessment, which nowadays is the worldwide standard for managing every
maintenance activity in the oil and gas industry as well as many other
fields, he explains.
Pemex also for many years before the reform worked with leading

Sale/Rent/Installaon of marine cranes


Training and cercaon of crane operators and mechanics
Lease and maintenance of welding machines
Quality, Safety, Service
Inspecon of penetrang liquids
Inspecon and lubricaon of steel cables
Corporavo Industrial y Comercial S.A de C.V.
OFFICES:
Tamborcito s/n Km 4 + 500, Col. Renovacion VII
Ciudad del Carmen, Campeche, Mxico
938 138 10 50
Comalcalco, Tabasco
933 334 42 93
Paraiso, Tabasco
933 333 43 78
www.cicsagruas.com

oilfield service companies on a quasi-incentivized basis. For companies


like Schlumberger, this was an opportunity to develop a new set of skills
according to the demands of the market. Over the past few years,
Mexico has also become a key market for our Integrated Project Management (IPM) business, explains Bhattacharya of Schlumberger. Being among the first oilfield service companies to offer IPM solutions, for
over two decades now, Mexico was one of the countries where we
started managing some of the largest projects; starting with the development of the Burgos basin in the north of the country, down to Chicontepec and further south to Villahermosas basins which are wellknown for their complexity. From an IPM perspective, Mexico is an
important part of Schlumbergers portfolio and will continue to be so,
particularly as deepwater projects gain momentum in the country.

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Companies mentioned in this issue of Oil & Gas Financial Journal are listed in
alphabetical order with advertisers in boldface type. The index is provided as
a service. The publisher does not assume any liability for errors or omission.

COMPANY

PAGE

COMPANY

COMPANY/ADVERTISER INDEX
PAGE

Aberdeen Group

33

EnerCom Inc.

18

ACCC

14

EnerFi Capital

Acorn Energy

65

ENERGYNET

25

AEGIS ENERGY RISK

9,39

ENERTIA SOFTWARE

COMPANY

PAGE

Lucas Energy Inc.

53

MAQUARIE GROUP LTD.

COMPANY

PAGE

Ridgemont Equity Partners

54

Royalty Partners LLC

57

Marathon Oil

38

RSP Permian Inc.

51

Mart Resources

55

Rystad Energy

16

53

Saddlehorn Pipeline Co.

14

Samsung Engineering Co. Ltd.

14

Akin Gump Strauss Hauer & Feld LLP

65

ENI

28

Matador Resources Co.

Amber Resources

67

EnLink Midstream

15

Mayer Brown

American Petroleum Institute

48

EOG Resources Inc.

51

McDermott International Inc.

67

Sanchez Energy Corp.

67

Anadarko Petroleum Corp.

14

EP Energy Corp.

52

McKinsey & Company

45

Sanchez Production Partners LP

69

Antero Resources Corp.

53

EPL Oil & Gas Inc.

53

Metroworth Consulting

49

Santa Maria Energy Corp.

51

Apache Corporation

38

EQT Corp.

14

Mexican National Hydrocarbons Commission

Santonia Energy

55

Apollo

32

EQT Midstream Partners LP

14

12

SBC

41

Aqualis Offshore

65

Equal Energy Ltd.

53

Midstates Petroleum

54

SBM Offshore NV

Artek Exploration

55

EQUITY METRIX

21

Midwestern Oil & Gas

55

Schlumberger

ASRC Energy Services

69

EV Energy Partners LP

51

Moda Midstream LLC

14

SEC

Atlas Resource Partners LP

52

Evercore

55

Mullen Crane and Transport

69

Seyfarth Shaw LLP

Australia Pacific LNG

68

Evercore Group LLC

15

Murphy Oil

52

Baker Botts LLP

15,30,68

EXCO Resources Inc.

Baker Hughes

19,64,69

ExxonMobil

13,68

16,38

Shell

31
49,69
51
48
12,28,45

Natural Gas Partners

55

Sidley Austin LLP

68

12,28,54,68

Natural Resource Group

14

Simmons & Company International

64

64

NETHERLAND, SEWELL
& ASSOCIATES INC.

56,BC

Baseline Energy Resources

54

FAA

Bear Head LNG Corp.

15

FERC

Bennet Jones

65

Fifth Creek Energy Co.

55

Standard & Poors Ratings Services

26

Berkshire Hathaway Energy

68

Fitch Ratings Services

31

Noble Energy

16

Statoil

54

BG Group

12

Flowserve Corp.

67

NSE

15

Sterne Agee

13

Blackstone

32,55

NUTECH

64

Stophlet & Associates

69

14,15

FOCUS REPORTS LTD.

70-78

Sky-Futures USA
Southwestern Energy Co.

NGP ENERGY CAPITAL MANAGEMENT IFC

64
15,51

BMO Capital Markets

57

Forest Oil Corp.

52

Occidental Petroleum

38

Strategy&

37

Bonanza Creek

55

Founders Investment Banking

64

Odebrecht Offshore Drilling Finance Ltd.

31

Sundance Energy Australia Ltd.

53

Franks International LLC

64

OECD

37

Talisman

12

Oiltanking North America LLC

14

Tamarind Energy

67

12,18,28

Techint

65

Opportune LLP

64

Technip

65
14

BP

12,28,35

Braemar Engineering

14

FX Energy Inc.

52

Breitling Energy Corp.

65

GAID

72

British Petroleum Oil Co.

67

Gastar Exploration Ltd.

51,53

Butler Snow LLP

64

Global Marine Systems

69

OSX

31

Texas LNG Brownsville LLC

C.I.C.S.A.

78

GlobalData

12

PacifiCorp Energy

68

The Babcock and Wilcox Co.

Cabot Oil & Gas Corp.

53

GRAVES & CO.

69

Parker Drilling

69

The Broe Group

CATERMAR DE MEXICO

75

Great Western Oil & Gas Co.

Parsley Energy Inc.

53

The Windsor Parks, Recreation & Culture

CB&I

67

GSO Capital Partners

55

Pearson Partners International

49

Department

CEAA

15

Helix Energy Solutions Group

69

PEMEX

12

Thompson & Knight LLP

Chevron Corp.

12

Hess

54

Penn West Petroleum Ltd.

53

Timco Services Inc.

64

Chief Oil & Gas LLC

56

Hilcorp Energy

56

Petrobras

31

Total

28

Citation Oil & Gas Corp.

56

Houlihan Lokey Capital Inc.

65

Petron Energy II Inc.

51

Tourmaline Oil

55

Cities Service

68

Howard Midstream Energy Partners LLC

15

Petrotechnics USA Inc.

33

Triangle Petroleum Corp.

52

Citrus Energy Corp.

56

IChemE

34

Philip Services Corp.

67

Tullow Oil plc

65

Pintail Oil & Gas

54

UARB

15

PLS Inc.

54

UCLA

48

Premier Oil

68

UK Oil & Gas Investments PLC

64

Prices Waterhouse

67

US Census Bureau

49

Purple Land Management

69

US Department of the Interior

QR Energy LP

53

QUANTUM RESERVOIR IMPACT

35

Quantum Energy Partners

55

ClearHedging

ConocoPhillips

16,28,38,68

IEA

57,80

13,28

IGas Energy

Continental Resources

54

IHS

Coronado Midstream Holdings LLC

15

Imperial Oil Ltd.

Crain, Caton & James

14

55
32,56
53

INDUSTRIAS ENERGETICAS

70

Ineos

55

OPEC

67
57,80
80
14,57

CUDD ENERGY SERVICES

Daybreak Oil and Gas Inc.

53

Inspection Oilfield Services

Delta Petroleum Corp.

67

IPAA

US Shale Solutions Inc.

69

Devon Energy Corp.

52

Jefferies LLC

57

Questar Corp.

68

USSI

65

DHS Drilling Co.

67

J-W Operating Co

56

Quicksilver Resources Inc.

64

Vanguard Natural Resources LLC

Drillinginfo

67

Kelt Exploration

55

Douglas Westwood

12

Kern River Gas Transmission Co.

68

Qv21 Technologies Inc.

46

Walter Oil & Gas Corp.

56

DYCGSA

76

KKR

32

Rabobank

28

Warren Resources Inc.

56

Ecopetrol SA

12

Kodiak Oil & Gas

54

Rackspace

67

Whiting Petroleum Corp.

54

EIA

41

KPMG LLP

67

Ralph E. Davis Associates LP

64

Williams

15

Elf Aquitaine

68

L.B. Foster Co.

65

Range Resources Corp.

52

Wood Group

67

Encana

31

Legacy Reserves LP

52

Red Mountain Resources Inc.

53

Wood Mackenzie

13

EnCap Flatrock Midstream

14

Lilis Energy

67

Woodside

14

Endeavour International Corp.

53

Linn Energy

52,55

WPX Energy Inc.

53

Enduro Royalty Trust

51

Lloyds Register

APRIL 2015

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OIL & GAS FINANCIAL JOURNAL

65
IBC

WWW.OGFJ.COM

15

QUORUM BUSINESS SOLUTIONS INC. 56-63

REGIONS FINANCIAL

Rex Energy Corp.

53

Richards, Layton & Finger PA

15

US ENERGY DEVELOPMENT CORP.

11,69

US House Committee on Natural Resources 6

Vinson & Elkins LLP

52
14,57,64

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BEYOND THE WELL

Work together, grow together


THE BROE GROUP, GREAT WESTERN DONATE TO COLORADO CHILDRENS PROGRAMS
PRIVATE INVESTMENT and management

development at Great Western Development Company.


company The Broe Group holds a multi-bilPrograms offered through the Windsor Parks, Recreation, &
lion dollar portfolio of real estate, railroads,
Culture Department attract over 70,000 participants annually to
energy, and tech investments. With its headsports including baseball, basketball, football, soccer, lacrosse,
quarters in Denver, and its oil and gas portfosoftball, fencing, cheerleading, tennis and golf, plus dozens of arts,
lio company Great Western Oil & Gas Commusic and dance classes.
MIKAILA ADAMS
pany LLC operating a significant drilling
Windsor town manager Kelly Arnold expressed gratitude for
EDITOR OGFJ
program in the Denver-Julesberg basin, The
the support. The Town of Windsor truly appreciates The Broe
Broe Group is deeply rooted in Colorado.
Family Foundation and the support companies affiliated with the
Both The Broe Group and Great Western Oil & Gas Company
Broe family continue to provide to the citizens of Windsor.
are investing in the future of the community in which they live
In February, The Broe Group affiliate Great Western Oil & Gas
and work. Recent donations have been made with the goal of enmade a gift of $21,000 to the Windsor Charter Academy. The doriching the lives and education of chilnation is helping fund comprehensive
dren in northern Colorado.
learning environments for a math classEarlier this year, The Broe Family
room, learning lab, and the schools SpeFoundation donated $25,000 to the Colcial Education suite.
orado town of Windsor for the creation
Supporting our local schools and
of The Broe Family Foundation Windhelping build a better future for our chilsor Scholarship Fund, a program that
dren is a great way to give back to a
subsidizes fees for qualifying children to
community that has welcomed us and
participate in town recreation services.
given us so much, said Great Western
The program is being developed and
CEO Rich Frommer.
will be available for the summer
The gift followed Great Westerns
season.
2014 donation of $20,000 for the purThe Broe family and all of our colchase of Android tablets for two Tozer
leagues are very pleased to be able to
Primary Schoool classrooms in the
offer these scholarships to our neighWeld Re-4 School District.
Three Great Western employees present a check to
bors in Windsor who require a little help Windsor Mayor John Vazquez (right).
Great Western senior surface landaccessing the worthwhile and fun
man Eric Creed was present at a work
sports, arts and other activities offered
session in which Windsor Mayor John
by the town. We continue to be committed to the region and beVazquez and Sean Ash, president of the school board, discussed
lieve that commitment goes beyond the jobs created and taxes
budget constraints felt by Weld Re-4, setting the donation in
generated to supporting those who really need assistance, said
motion.
Sean Broe of The Broe Group.
I firmly believe that our children only make up 20 percent of
The Windsor Parks, Recreation & Culture Department is adour population, but theyre 100 percent of our future, and it takes
ministering the reduced rate scholarship program, which is also
a community to work together and to grow together, said Weld
funded by donations from multiple sources including the WindRe-4 Superintendent Karen Trusler.
sor Town Board and United Way of Weld County. Scholarships
When presenting the donation to the district, Great Western
are available to Windsor residents meeting guidelines for income
CEO Frommer cited his own career as a geologist as an example
and household size. Each child can qualify for up to $225 per year.
of the need to introduce technology at an early age. When he
Last year, children from 50 families received scholarships under
started in his field, he said, everyone used graph paper and slide
the program.
rules, but now, everything is done on laptops. We need to get
The Town of Windsor and The Broe Family Foundation will
kids started today in getting comfortable with technology, he
establish the endowment fund and a board to administer the exsaid.
panded program under the name The Broe Family Foundation
We are honored to be able to make this investment in our fuWindsor Scholarship Fund. The board is expected to include Meture, which is our children in this community, he continued. We
lissa Chew, director, Windsor Parks, Recreation & Culture Dewant to be good neighbors. We want to do the best thing we can
partment; Eric Creed, senior surface landman at Great Western
with the smallest impact on the community, and with the greatOil & Gas Company, and Jenni Stanford, director of industrial
est upsides.
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OIL & GAS FINANCIAL JOURNAL

APRIL 2015

3/31/15 3:29 PM

A Special Thank You to


the 2014-15 IPAA Chairmans Club
The IPAA Chairmans Club recognizes member companies and individuals who
provide a considerable amount of funding throughout the year to support IPAAs
government relations, educational, networking and Energy In Depth eforts.
To become a member of IPAAs Chairmans Club, contact Tina Hamlin at thamlin@ipaa.org.

I N D E P E N D E N T P E T R O L E U M A S S O C I AT I O N O F A M E R I C A

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