APRIL 2018

The “Better Business” Publication Serving the Exploration / Drilling / Production Industry America’s Energy Future Reshaped By Oil, Gas Supplies From Tight Rock Formations By Philip H. “Pete” Stark and Bob Fryklund

HOUSTON–Ten years ago, the United States was producing 63 billion cubic feet of natural gas and 5 million barrels of oil a day, with only a slight percentage of total supplies flowing from “tight rocks.” Jump forward to 2018 and America has been recast as a global energy superpower, on track to produce more than 80 Bcf of gas and 10 MMbbl/d of oil–both all-time highs, and both enabled almost entirely by soaring output from resource plays. What the U.S. energy industry–led by independent oil and gas companies with corporate logos few of the consumers benefitting from their efforts would recognize–has accomplished is nothing short of astonishing. The laws of nature and physics, not to mention petroleum engineering, dictate that a finite resource will deplete over time. Instead, after more than a century of producing oil and gas, U.S. reserve estimates and production volumes for both oil and gas abruptly and dramatically reversed course with the development of shale gas and tight oil. Given the magnitude of the swing from world’s largest energy importer to potentially one of the world’s largest exporters, it is hard to think of a single historic corollary.

Reproduced for IHS Markit with permission from The American Oil & Gas Reporter www.aogr.com AMERICA : T HE ENERGY SUPERPOWER

Certainly, there never has been anything sustainable and affordable energy. That We are witnessing a new way of thinking like it among countries in the Organization is why horizontal resource plays have about rocks and the volumes of potential for Economic Cooperation and Develop - massively changed the game. hydrocarbons trapped in their three-di - ment. In fact, the amount of oil production The United States can be confident mensional spaces. We know there are a growth that the United States experienced that it not only possesses plentiful energy lot more alternatives to accessing those between 2012 and 2014 was the largest supplies to power the domestic economy, hydrocarbons, whether conventional continual year-over-year increase in his - but also can export a portion of those stratigraphic and structural traps or source tory, exceeding even the best years of supplies to allies overseas. Already the rocks and basin centers. This is a para - production growth in Saudi Arabia. globe’s top exporter of liquefied propane digm shift away from what geologists The same meteoric rise also occurred gas and among the top five exporters of were learning in college classrooms 15 in natural gas, with the United States refined crude products, now America years ago. adding nearly 1 trillion cubic feet of new consistently is exporting 1 MMbbl/d of production each year between 2009 and crude oil and soon will be one of the Downturn Upside 2013 to become the world’s largest pro - largest liquefied natural gas exporters. The first decade of the shale revolution ducer seemingly overnight. That provides security advantages almost was characterized by proving up the eco - As a result, the nation has been able beyond measure, and enables much greater nomics, securing leaseholds and drilling. to completely reshape its energy fortunes. flexibility in international affairs and That came to a screeching halt in late Gone are worries about economy-crippling policy making. 2014, when one of the most severe down - shortages and price shocks, concerns Then, of course, are all the economic turns in the industry’s history interrupted about dependencies on foreign supplies, benefits (such as more than 1.6 million the party. Taking the long view, however, and fears of inadequate feedstocks for newly created jobs). The results are evident for all the pain the down cycle caused, high-value domestic industries such as everywhere, whether in and the U.S. industry accomplished a remark - petrochemical manufacturing and steel - North Dakota, where tight oil has led to able feat. Out of sheer necessity, operators making. America has gone from being a economic rebirths, or Pennsylvania and and service and supply companies swiftly major demand center dependent on high- West Virginia, which are benefitting from turned erstwhile high-cost shale gas and cost imports to being a major new supply growing shale gas production even as tight oil into some of the world’s lowest- epicenter with low-cost resources abundant their coal industries decline. is cost energy supplies. enough to share with the world. now the number one state for oil, gas and It could be argued, in fact, that the Resource plays have not only hit the wind energy production. Major new trans - past three years’ efficiency gains, pro - reset button on U.S. oil and natural gas portation, storage, refining and petro - ductivity enhancements and structural supplies at the same time, but also have chemical infrastructure is being built in cost improvements constituted the most transformed the global market. The United regions across the country, creating jobs rapid transformation in industry history. States has a new function: crude oil, and boosting tax revenues. Without the extreme pressure to prevail refined oil products, natural gas and In only two short decades since U.S. in the low-commodity price environment, natural gas liquids supplier to the world. operators opened a new class of hydro - these stunning improvements may not The benefits are nearly as extraordinary carbon reservoirs, oil and gas production have materialized for a decade or two. It as the story of the U.S. unconventional volumes have climbed to historic peaks was made possible by innovative thinking revolution itself. Consider the difference and America is positioned to become a about how to apply technology to better in world economies today if, as forecast top energy exporter. Where does the shale understand tight rock formations and op - 10 years ago, oil was trading at $125/bbl gas and tight oil revolution go from here, timize well construction operations. and natural gas was selling for $12/MMB - and what will U.S. independents–the pi - The break-even cost in the best tight tu. The U.S. economy would be limping oneering companies that set this profound oil projects has dropped from $60-$65 to along, as would the economies of many cycle of disruptive change in motion–do $25-$30 a barrel. While productivity and other countries. for an encore? cost probably will not improve as rapidly The industry has come a long way in during the next three years, experience Historic Achievement a short time, but there is still much more suggests additional breakthroughs await When scientists look back in 60 years to learn. We have discovered so much to nudge costs downward and recovery at what technologies or innovations about the rocks themselves. It is clear factors upward, while opening additional changed the way people lived, the shale that the wrong development approach resources for economic recovery. revolution will rank among the greatest can render a good rock bad, and that no The industry also has learned how to advancements of this century. U.S. re - approach can make a bad rock good, but take greater advantage of the data it source plays have altered the energy mar - operators are challenging that dictum to already has. During the downturn, oil kets forever, similar to how the smart some degree by moving outside the fair - and gas professionals had more time to phone and Internet have changed how ways to investigate what it takes to make dig deeper into data. Companies began we communicate with and relate to our shale basins’ second- and third-tier areas using sophisticated algorithms and ana - world. The number one factor that makes profitable. lytical tools to mine datasets and gain societies economically competitive and It also is fair to say that the shale new insights into geology, operational ensures a high quality of life is access to revolution is reinventing geology itself. workflows and engineering designs. That VISION 2020 has led to much better wells at much era of experimentation to figure out the Moreover, with so much associated lower costs. optimal drilling and completion designs, gas in tight oil plays, oil activity will Data analysis also directly factors into and getting it right may prove a struggle start to function as a governor of gas one of the key contributors to resource in some areas. supply, especially in the Permian. Some plays’ economic success: speeding decision The single biggest challenge going companies may find themselves “caught making and field activities. Drilling forward is increasing EURs. This is an in the middle” to some extent between Bakken and Eagle Ford wells once took extremely important driver on which al - the Permian and Appalachian superbasins, 45-60 days. Now, these wells are reaching most every company is working. There but again, that is not to suggest that total depth in only six or seven days, is a lot of room to run. The very best re - players in the Eagle Ford, Bakken, even with significantly longer laterals. covery factors in the very best tight oil SCOOP, STACK, Niobrara and other Every well drilled on a pad is a new in - wells are in the 10-15 percent range. basins outside the Permian and Appalachi - formation center, and operators are feeding That is better than five years ago, but an will not thrive. that information back into the decision still not good enough. During the next The big question is whether any plays making process for the next well. It is decade, it is feasible that tight oil EURs that are not yet on the map will emerge “real-time thinking” based on new ways can increase to 20 percent, and in some during the next couple years. At IHS to quickly and accurately analyze data. fields, even approach conventional fields’ Markit, we no longer talk about uncon - 34 percent estimated global EUR aver - ventional plays, but tight rock plays, Tomorrow’s Challenges age. many of which are actually conventional Most tight rock plays have a steep This will require returning the focus formations. Many of these conventional growth curve for the first four-five years, to the stimulated rock volume to figure plays have remained off the radar–hence, after which productivities tend to decel - out how to open more reservoir to allow we call them “sleeper plays.” We are erate. That is because operators achieve more hydrocarbons to escape tight rocks. starting to see sleeper plays pick up the most they can by increasing lateral It will not be easy, particularly in sec - steam. By and large, these are low-per - lengths, frac densities, proppant and fluid ond- and third-tier areas, but the pro - meability/low-porosity formations that volumes, etc., in the best available rock. ductivity learning curve that operators were tested with vertical wells in the After the steep initial four- to five-year recently navigated when they were under past and found uneconomic. This includes ramp up, efforts to further enhance pro - pressure to perform at low prices indicates a number of intervals in basins such as ductivity begin to yield diminishing re - the type of EUR enhancement that is the Anadarko, Powder River, Uinta, turns. With drilling and completion activity possible. Greater Green River and East Texas/Up - now expanding outside core areas in tight Other variables that may impact the per Gulf Coast. oil and shale gas plays, it raises major industry’s collective ability to tap resource Independents have been scouring older questions about what that could ultimately plays’ fullest potential are aboveground basins in search of tight rocks. Soon, mean to productivities, decline curves, issues such as opposition to constructing some of these plays will begin to pop up, estimated ultimate recoveries and general new pipelines and plants, changing public especially in the Powder River and Green well economics. It is similar to dollar attitudes about energy, and governmental River basins. But even a mature province cost averaging, with overall performance policies. The industry simply must operate such as the Gulf Coast will see new tight reduced to some degree by second- and in environmentally responsible ways. rock plays, including perhaps some Eagle third-tier areas as operators try to figure Good environmental stewardship is as Ford-equivalent tight formations in north - out the right recipes for imperfect rocks. critical to long-term sustainability as ef - ern Louisiana. This is a new concept It stands to reason that acreage in sec - ficiency and EUR improvements. whereby operators are thinking differently ond- and third-tier areas will not perform about geology and figuring out new ways as well as first-tier acreage. Therefore, it Tight Rock Opportunities to apply horizontal drilling and hydraulic is hard to see how moving into areas By 2020, IHS Markit forecasts that fracturing technologies. with lesser-quality rock will not contribute U.S. oil production will stand between With activity focusing on two U.S. to a plateauing of overall efficiencies and 11 MMbbl/d and 12 MMbbl/d, while superbasins–one for oil, and one for gas– productivities. In fact, the data indicate natural gas production will be north of smaller independents will find a wealth that many plays already have arrived at 85 Bcf/d. Oil supply will revolve around of opportunities to use horizontal drilling that stage. The Permian is an exception the Permian Basin while natural gas fo - and hydraulic fracturing in secondary because it is still in the initial four-year cuses on the Marcellus/Utica plus asso - plays throughout most of the country’s ramp up phase. ciated gas in the Permian. In fact, in 10 historic oil and gas-producing areas. We Moving to the next acceleration point years, we see 70 percent of oil production have identified many tight conventional will require even more technology and growth coming from the Permian. That reservoirs that historically have under - innovation, especially outside the fairways. does not mean production in the Eagle performed with vertical drilling, but hold Instead of drilling 10,000-foot laterals Ford, Bakken, SCOOP, STACK, Niobrara the potential to deliver economic pro - and pumping 30 stages, perhaps wells in and offshore Gulf of Mexico will not be duction using shale play-like drilling and the second and third tiers would be better growing, but that growth in the Permian completion methods. The production vol - with 4,500-foot laterals and 18 stages. will be significant enough to overshadow umes will not necessarily overwhelm, Operators will have to undertake a new other basins. but these sleeper plays will provide ex - AMERICA : T HE ENERGY SUPERPOWER cellent opportunities to keep smaller in - However, while it does not make the For instance, in the race between natural dependents active for years. news, a significant percentage of all hor - gas and alternative fuels in power gener - Meantime, larger independents will izontal wells drilled in the Permian have ation, and between oil and electricity for remain the dominant players in the es - been outside the shales in tight conven - transportation, efficiency and cost-effec - tablished shale plays. We are seeing the tional formations such as the San Andres, tiveness will be of paramount importance. rise of the pure-play specialist in the Per - Clear Fork, and Abo. These off-the-radar The U.S. companies that figured out how mian and Appalachian basins. There is plays are yielding additional hydrocarbons to economically produce from shales and some question as to whether these pure- and boosting EURs in and around the tight rocks, and then pushed into new play basin masters will become the com - main shale fairways. productivity and efficiency frontiers during mercial masters, which may drive further In the final analysis, the rise of resource the downturn, have made the oil and gas consolidation post-2020, but it should plays and the improved economics of business viable for decades. r be, more or less, business as usual for developing these reserves has reset the the big players in the big plays. oil and gas business in very positive Editor’s Note: As Pete Stark prepares The Permian provides a good micro - ways. North America has more than 1,100 to retire from a long and productive cosm of the overall trends. There are trillion cubic feet of estimated economi - career, AOGR’s staff extends its sincere some 600 operators active in the basin. cally recoverable gas reserves at a com - gratitude to Pete for his invaluable con - That is related to the fact that when the modity price of less than $4 an Mcf. The tributions to the magazine over the years. majors exited 20-30 years ago, the inde - same thing is happening in oil reserves. Few industry thought leaders have pro - pendents moved in and acquired parts This is critical to the long-term sustain - vided more insights to help AOGR’s read - and parcels of their holdings. The larger ability of oil and gas. Affordable prices ers understand market and technical trends. independents are leading the way in the and reliable supplies will keep oil and AOGR Publisher Charlie Cookson adds Wolfcamp, Bone Spring and other plays, gas competitive with other energy sources his personal thanks for helping him make but the majors and super independents far into the future, and that is one of the it through the rigors of State are coming back with Chevron, Exxon - legacies of lower-48 resource plays that University 40 years ago. Happy trails, Mobil and Occidental each announcing transcend short- and intermediate-term old friend! multibillion-dollar investments. market conditions.

Philip H. “Pete” Stark is executive director, upstream research (emeritus) for IHS Markit in Englewood, Co. Prior to joining IHS in 1969, Stark was an exploration geologist for Mobil Oil. Stark has authored papers on a range of upstream topics and technologies, and co-au - thored studies on North American gas supplies, unconventional gas supplies, North American and global tight oil, and global superbasins. He holds a B.S. in geology from the University of Oklahoma and an M.S. and Ph.D. in geology from the University of . PHILIP H. “PETE“ STARK

Bob Fryklund is vice president and chief strategist for IHS Markit’s upstream energy group. With more than 38 years of industry experience, he joined the company in 2006 after serving in various geologist and leadership positions with ConocoPhillips, British Borneo, Union Texas and Amerada Hess. Fryklund has published numerous articles and frequently speaks at conferences and events. He holds a degree in geology from Hamilton College and has completed advanced studies at the University of Houston and the University of Tulsa. BOB FRYKLUND