2. Shale
Oil
is
different
to
Conven?onal
Oil,
but
not
like
Mining
either
…
•
•
•
•
•
•
•
•
•
Mining
has
no
recent
enabling
technology
like
horizontal
drilling
&
fracking
for
shale
oil
Mine
development
is
much
further
along
the
learning
curve
than
shale
oil
development
TransportaGon
infrastructure
and
shore
access
is
key
for
mining,
not
so
much
for
shale
oil
Mining
is
autarkical,
shale
oil
requires
extensive
services
infrastructure
Mining
is
a
lumpy
business,
shale
oil
much
more
scalable
Mining
lead
Gmes
are
much
longer
than
shale
oil
Mine
development
cost
depend
on
global
macro
factors
and
local
labor
cost,
while
shale
oil
development
cost
depend
on
capacity
uGlizaGon
levels
of
local
well
construcGon
Mining
(near/surface)
requires
exclusive
land
use,
with
shale
oil
land
use
is
shared
Mining
is
dominated
by
a
few
large
players,
shale
oil
is
a
fragmented
industry
So,
if
similariGes
with
mining
are
weak,
what
type
of
business
is
shale
oil?
SHALE
OIL
MATTERS
….
Page
2
3. Shale
Oil
…
global
factors
•
•
•
•
•
•
Young
business
with
explosive
growth
in
USA
and
a
lot
of
learnings
yet
ahead
3.0
MMbopd
US
shale
oil
producGon
in
Nov
2013
from
less
than
0.5
MMbopd
5
years
ago
Was
triggered
by
oil
price
rise
plus
technical
enablers
-‐
horizontal
drilling
&
fracking
Shale
oil
has
aYracted
many
new
players
in
addiGon
to
tradiGonal
oilcos
So
far
mostly
in
USA
and
Canada,
with
above
ground
factors
impeding
global
expansion
Most
promising
overseas
is
Vaca
Muerta
shale
in
ArgenGna
and
Bazhenov
shale
in
Russia
Shale
oil
may
yet
turn
into
a
global
oil
market
revoluGon
–
OPEC
has
taken
note
SHALE
OIL
MATTERS
….
Page
3
4. Shale
Oil
…
project
features
•
•
•
•
Shale
oil
development
focus
moving
from
“efficient
wells”
to
“resource
maximizaGon”
• Efficient
wells:
faster
wells,
longer
laterals,
more
frac
stages
and
beYer
frac
efficiency
• Resource
max:
lateral
downspacing
to
≈50
acres,
frac
stage
opGmizaGon
to
≈200
d,
Shale
oil
development
opGmizaGon
via
pilot
projects,
data
mining
and
incremental
improvements,
as
opposed
to
front
end
loading
and
numerical
modeling
for
convent’l
oil
Cost
drive
via
well
manufacturing
approach:
pad
drilling,
rig
walkers,
zipper
fracs,
acreage
uniGzaGon,
supply
logisGcs,
spud-‐to-‐POP
duraGon,
use
of
natural
gas
Large
remaining
scope
for
improvements:
verGcal
placement
of
laterals,
frac
stages
opGmizaGon,
stress
field
examinaGon,
resource
drainage
improvements,
frac
spread
simplificaGon,
drill
&
frac
fluids
recycling,
frac
propagaGon
control,
downhole
monitoring
Efficiency
gains
will
be
significant
and
will
spread
quickly
amongst
the
players
SHALE
OIL
MATTERS
….
Page
4
5. Shale
Oil
…
project
economics
•
•
•
•
•
Very
high
incremental
well
IRRs
and
per
well
margins
are
key
for
shale
oil
success,
while
key
to
convenGonal
oil
is
upfront
managing
of
reservoir
uncertainGes
Scalable
field
development
with
early
cash
generaGon
instead
of
lumpy
long-‐lead
projects
Well
NPVs
need
be
discounted
with
much
higher
opportunity
cost
of
capital,
not
WACC,
in
order
to
include
the
benefits
of
larger
opportunity
capture
via
faster
capital
recycling
Focus
for
wells
shided
away
from
EUR
to
IP,
as
result
of
using
the
higher
OCC
Shale
oil
projects
have
significant
natural
hedge
against
oil
price
risk,
as
commodiGzed
US
onshore
drilling
day
rates
and
per
stage
frac
cost
inversely
correlated
to
well
margins
ConvenGonal
oilcos
struggle
understanding
the
new
shale
oil
business
model.
Their
tradiGonal
key
strengths
(front-‐end
engineering/modeling,
business
processes
and
financial
strength)
are
not
a
good
fit
for
the
shale
oil
challenges
SHALE
OIL
MATTERS
….
Page
5
6. Shale
Oil
…
financial
maMers
•
•
•
•
•
•
•
Early
reserves
booking
crucial
to
raise
debt
finance
Reserves
booking
greatly
facilitated
via
well
type
curves,
analogues,
legacy
wells
Efficient
working
capital
management
imperaGve
for
high
NPAT
results
Producing
shale
oil
can
be
securiGzed,
offering
exposure
to
long-‐term
inflaGon
&
oil
prices
Producing
shale
oil
may
be
organized
under
MLPs,
linking
tax
benefits
with
liquidity
of
traded
securiGes
Shale
oil
securiGzaGon
or
spin
off
into
MLPs
are
efficient
liquidity
measures
Onshore
shale
oil
offers
great
scope
for
OPEX
iniGaGves
to
add
value
to
mature
fields
Shale
oilcos
must
pay
close
aYenGon
to
capital
markets
(reserves,
PR)
and
capital
efficiency
(allocaGon,
recycling,
OCC,
tax)
SHALE
OIL
MATTERS
….
Page
6
7. Shale
Oil
…
corporate
maMers
In
the
long
run,
I
see
two
dominant
types
of
shale
oil
players
for
early
life
and
late
life
assets:
1. Shale
oil
developer
–
aggressive,
innovaGve,
savvy,
private
equity,
capital
focus,
buy-‐to-‐sell
2. O&M
manager
–
diligent,
OPEX
manager,
publicly
listed,
opex
focus,
buy-‐to-‐hold
Large
tradiGonal
oilcos
more
aYuned
to
the
O&M
phase
and
many
have
their
war
chests
ready
SHALE
OIL
MATTERS
….
Page
7
8. Hence,
what
are
the
key
success
criteria
for
shale
oil
?
•
•
•
•
•
•
•
•
•
•
Young
business
–
speed,
flexibility
and
learnings
are
all-‐important
Acreage
based
–
loca?on
is
very
important
and
how
well
and
efficiently
it
is
developed
US
centered
–
currently
working
shale
oil
outside
the
US
amounts
to
“missing
out”
Shale
oil
is
different
–
paramount
to
NOT
apply
the
business
logic
for
conven?onal
oil
Growth
levers
–
via
acquisi?ons
and
focus
on
capital
markets
&
capital
efficiency
Jekyll
&
Hyde
nature
–
2
polarized
owners
over
2
very
different
phases
over
asset
life
cycle
• Development
phase
–
aggressive
innovator,
savvy
development
architect,
no
aMachments,
focus
on
capital
• O&M
phase
–
diligent
finisher,
long-‐term
commiMed,
tweaking
margins,
focus
on
opex
Oil
prices
–
work
with
the
natural
hedge
during
development
phase
Alignments
–
private
equity
during
development,
services
companies
during
O&M
phase
People
–
entrepreneurs
during
development,
margin
tweakers
during
O&M
phase
Timing
–
entry
NOW
for
shale
oil
developers;
don’t
miss
your
stop,
move
to
the
next
dvmnt
SHALE
OIL
MATTERS
….
Page
8
9. Any
risks
with
shale
oil
?
•
•
•
•
•
•
Oil
prices?
….
No,
would
not
worry
about
oil
prices
too
much,
unless
for
O&M
managers:
• Oil
sands
and
DW
offshore
cannot
compete
with
shale
oil
• There
is
a
natural
hedge
during
the
shale
oil
development
phase
Compe??on?
….
Yes,
business
entry
barriers
are
much
lower
than
for
convenGonal
oil
Exit?
….
Yes,
important
for
shale
oil
developers
not
to
miss
the
stop
and
to
divest
Shale
gas?
….
Yes,
poses
a
significant
risk
to
DEVEX,
since
it
uses
the
same
rigs
and
frac
fleet
Infla?on?
….
Yes,
for
future
O&M
managers,
trying
to
tweak
the
margins
Environmental?
....
Insignificant
compared
to
offshore,
sour
gas
or
oil
sands
SHALE
OIL
MATTERS
….
Page
9