Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
DECEMBER 2016
WPX IMPLEMENTS
3-BASIN STRATEGY
SPECIAL FOCUS:
2017 OUTLOOK
TRUMP AND ENERGY
CAPITAL COST REVIEW
TPH & CO. MERGER
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CONTENTS
V13/N O . 12 | DECE MBER 2016
FEATURES
18
18
POST-ELECTION ANALYSIS
Incoming President favors enhanced E&P
as tenet of energy, economic, and national
security policy
20
SHALE UPDATE
North American shale wins 2016
34
24
COVER STORY
WPX ENERGY
OGFJ recently visited with Rick Muncrief,
president and CEO of WPX Energy, to learn
how he was able to reposition the company
to survive the worst industry downturn
since at least the 1980s. During the past two
years, Muncrief has built WPX into one of
the Top 20 US producers in terms of total
assets and market capitalization.
42
30
34
40
42
44
48
50
DEPARTMENTS
3
4
8
10
14
52
54
59
64
EDITORS COMMENT
CAPITAL PERSPECTIVES
SECOND THOUGHTS
UPSTREAM NEWS
MIDSTREAM NEWS
DEAL MONITOR
INDUSTRY BRIEFS
ENERGY PLAYERS
THE FINAL WORD
Oil & Gas Financial Journal (ISSN 1555-4082). Oil & Gas Financial Journal is published 12 times per year, monthly, by PennWell Corporation, 1421 S. Sheridan, Tulsa, OK 74112.
Periodicals postage paid at Tulsa, OK 74112 and at additional mailing offices. POSTMASTER: Send address corrections to Oil & Gas Financial Journal, P.O. Box 3264, Northbrook, IL
60065-3264. Oil & Gas Financial Journal is a registered trademark. PennWell Corporation 2016. All rights reserved. Reproduction in whole or in part without permission is prohibited. Permission, however, is granted for employees of corporations licensed under the Annual Authorization Service offered by the Copyright Clearance Center Inc. (CCC), 222
Rosewood Drive, Danvers, Mass. 01923, or by calling CCCs Customer Relations Department at 978-750-8400 prior to copying. We make portions of our subscriber list available to carefully screened companies that offer products and services that may be important for your work. If you do not want to receive those offers and/or information via direct mail, please let us know
by contacting us at List Services Oil & Gas Financial Journal, 1421 S. Sheridan Rd., Tulsa, OK, 74112. Printed in the USA. GST No. 126813153. Publications Mail Agreement no. 40612608.
DECEMBER 2016
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OGFJ
.com
FEATURED CONTENT
WEBCASTS
Did you miss our November webcast? Saudi Aramco presented
Data Lifecycle for Reservoir Simulation in Saudi Arabia.
Reservoir simulation data has been growing exponentially. In
2003, the reservoir simulation storage capacity was about 10
terabytes (TB), reaching 1000 TB in 2013, with a clear trend of
doubling every year. The utilization was always 95%, produced
and consumed by about 50 petroleum engineers, so users never
had enough space to finish their studies. Advanced techniques
that require more precision, new software, and cheaper storage
are provoking this growth. Listen to this, and other archived
webcasts, on OGFJ.com/webcasts today.
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WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:21 PM
EDITORS COMMENT
DECEMBER 2016
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CAPITAL PERSPECTIVES
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DECEMBER 2016
12/5/16 1:21 PM
CAPITAL PERSPECTIVES
Many opportunities can come from sellers who are not running their assets through an A&D shop and this is the most
likely scenario for a startup to match prospect with PE capital.To find out about these opportunities, the startup team
must tap into and develop its network of relationships
within the industry, from oil and gas professionals to banks,
attorneys, engineers, etc. Doing so takes a combination of
finesse, patience, and time. The startup team must reach
DECEMBER 2016
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1612ogfj_6 6
DECEMBER 2016
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DECEMBER 2016
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$ Million
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013
2014
2015
2016
120
120,000
100
100,000
80
80,000
60
60,000
40
40,000
20
20,000
0
$/boe
$ Million
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013
2014
2015
2016
Cash flow from operations
Capital expenditures
WTI ($/boe)
Henry Hub ($/boe)
in Q2 2016 with a combination of operating cash flow and external cash sources
and many of the companies have a successful share issuance to thank.
ABOUT THE AUTHOR
Hannah Mumby is a senior oil and gas analyst with Evaluate Energy.
She has a degree in Geology and a Msc. in Mineral Extraction. In her
role with Evaluate Energy, Mumby has analyzed oil and gas company
accounts and performance for the past 18 years. The Evaluate Energy
database includes over 25 years of financial and operating data for
more than 300 of the worlds biggest and most significant oil and gas
companies, including full coverage of the US E&P market. Evaluate Energy also
covers upstream, downstream, midstream and oil service sector merger and
acquisitions.
12/5/16 1:21 PM
SECOND THOUGHTS
tions. That is an important benefit because much of the equipmake of himDonald Trump is Presidentment that is required to perform oil and gas activitiesfor
elect and a Trump presidency is likely a posiupstream, or equipment to build midstream and downstream
tive for the North American oil and gas ininfrastructure and power projectscomes from the US. I dont
dustry as a whole.
anticipate restrictions being implemented in this front, but, if
Campaigning in Gettysburg, Pennsylvania
for any reason certain restrictions are placed on the importation
in late October, Trump spoke about his thenof that type of equipment, it could have an impact on expected
MIKAILA ADAMS
plan
for
his
100-day
action
plan
to
Make
investment in the sector.
EDITOR OGFJ
America Great Again. One proposed task:
The other indirect effect that a review or repudiation of
to lift the restrictions on the production of $50 trillion dollars
NAFTA could have would be on Mexicos GDP growth. At the
worth of job-producing American energy reserves, including
end of the day, both the power sector and the production of oil
shale, oil, natural gas and clean coal. Policy changes in this
and gas in Mexico impact the growth of the Mexican economy.
regard would likely benefit North American oil-weighted proSo to the extent that the growth of the Mexican economy is
ducers and those in the midstream space. In the same speech,
affected by any type of revisions to NAFTA, an impact on how
Trump noted his intention to renegotiate NAFTA or withdraw
much investment we would need in the sectors could be made.
from the deal under Article 2205.
As Mexico is a developing economy, there is great market
There are numerous US energy companies involved, in varipotential for US energy companies and the oil and gas produced
ous stages and capacities, in the
within, which fits well with Trumps
energy business in Mexico. For one, To view the impact of a potential modifistated energy industry goals. Rathere are projects to transport natu- cation of NAFTA on the long-term is more
mos said that, at least in the foreral gas from the US to Mexico, and complex and unclear at this stage. We dont
seeable future, there is a need for
pipelines being builtsome in have full visibility yet on what specific lines
power and gas and some oil-related
Texas and some in Mexico. What the Trump administration would actually seek, products in Mexico. By US Energy
could revisions or a complete US but the above represents a few of the issues
Information Administration calcuwithdrawal from NAFTA mean for the new administration should analyze before lations, US natural gas pipeline
the
various
w o r k i n g considering any revisions to NAFTA.
exports to Mexico from the US
relationships?
were up approximately 33% year
I reached out to Ariel Ramos, a
over year in April 2016, reaching
partner in the banking and finance practice and global energy
102.6 billion cubic feet.
group of Mayer Brown for his expertise and thoughts on the
There are still a lot of opportunities to import power capacity
matter. Speaking from his office in Mexico City, Ramos first
from the US, specifically from the Texas market where theres
provided a bit of history.
plenty of gas and power available, at least for the system in
The first point on background, he said, is that while NAFTA
Mexico. With respect to how much capacity consumers or
included certain specific energy provisions, it excluded NAFTA
industrial companies will need in the foreseeable futurewe
benefits from energy because of the Mexican energy regime at
still have a deficit of gas in Mexico that needs to be covered but
the time that NAFTA was approved included restrictions on
any effects in the growth expectation and investment could
private investment in oil and gas and power which were grandhave an impact, Ramos continued.
fathered under NAFTA. Following the constitutional reform in
Another factor is jobs. Trump campaigned on job-producing,
2013 and the subsequent reforms of applicable legislation, there
and as Ramos told me, NAFTA has created jobs both in the US
has been discussion about NAFTAs impact with respect to the
and Mexico and many US products are targeted to the Mexican
energy sectors in Mexico. The official interpretation from the
market. In the US, more than six million employees are directly
Mexican government was that NAFTA did not apply to the
related to the production of NAFTA-related products. And,
energy sectors and, as a result, the Mexican government has
there are approximately 60,000 US companies active in Mexico
the ability to retain and impose certain restrictions (such as
in different capacities, he detailed.
with respect to national content).
To view the impact of a potential modification of NAFTA
He told me that the potential impact of any renegotiation of
on the long-term is more complex and unclear at this stage. We
NAFTA with respect to energy would be indirect on two fronts.
dont have full visibility yet on what specific lines the Trump
On one hand, he said, most of the equipment and resources
administration would actually seek, Ramos told me as we ended
Mexico needs for the energy sector come from the US. Importathe call, but the above represents a few of the issues the new
tion of those under NAFTA are subject to minimum or no
administration should analyze before considering any revisions
customs duties and taxes or other kind of foreign trade restricto NAFTA.
8
1612ogfj_8 8
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:21 PM
Delivering
value up and
down stream
PwCs Energy team is one of the largest professional
services networks in the world with dedicated industry
resources, serving more than 2,500 oil and gas clients
of all sizes, from every segment of the businessfrom
upstream to downstream. For over a century, we have
helped energy companies succeed.
Were a network of separate firms in 157 countries with
close to 208,000 people who are committed to delivering
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To learn more about our global energy practice, visit
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2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see
www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with
professional advisors.
1612ogfj_9 9
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UPSTREAM NEWS
L to R Energy Ventures
partner Greg Herrera and
Tomas Hvamb, Energy
Ventures investment
director.
1612ogfj_10 10
DECEMBER 2016
12/5/16 1:21 PM
UPSTREAM NEWS
Rowan jack-up rigs currently in Saudi Arabia, until their associated drilling contracts expire, which then may be released, leased by or contributed to the new company thereafter. Rowan and Saudi Aramco have committed the new
company to purchase future newbuild rigs that will be constructed in Saudi Arabia.
Latham & Watkins LLP represents Rowan Companies plc
in the transaction.
In a flashnote following the announcement, Evercore ISI
analysts commented on the JV, calling it a nice, creative
approach with an important customer.
As part of the Kingdoms 2030 Vision, the JVs leadership will be comprised by a Rowan nominated CEO and head
of operations while Saudi Aramco will nominate the Chairman
of the Board and CFO. All Rowan rig personnel working in
Saudi Arabia will continue to work for the new company, and
the new company will begin hiring and training a domestic
workforce to meet its long term growth objective.
The analysts continued, There are currently 44 jackups
contracted in Saudi Arabia, of which two are owned by Saudi
Aramco (SAR 201, 202). Rowan is Aramcos largest independent drilling contractor at nine units, followed by Ensco and
Shelf Drilling with six jackups each.
Adler Field
DECEMBER 2016
1612ogfj_11 11
11
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UPSTREAM NEWS
PFLNG SATU
12
1612ogfj_12 12
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:21 PM
A TRUSTED
PLATFORM FOR
DIVESTMENT
With a network of more than 20,000 active accredited
buyers, EnergyNet is the trusted divestment platform of
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YOUR Success.
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1612ogfj_13 13
877.351.4488 energynet.com
12/5/16 1:21 PM
MIDSTREAM NEWS
B RIEFS
MAGELLAN
PETITIONS TO CREATE
MARKETING AFFILIATE
On November 14, 2016,
Magellan Midstream
Partners LP filed a petition with FERC to create
a Marketing Affiliate in
order to move crude oil
out of the Permian. Magellan is requesting that
the Commission act on
the petition by no later
than February 13, 2017.
14
1612ogfj_14 14
with the completion of other major capital projects currently in progress, are expected to continue to generate strong distributable cash flow
growth.
The combined partnership is expected to be
the second largest MLP as measured by enterprise
value.
At the closing of the transaction, the CEO,
chief commercial officer, president and CFO of
the combined partnership will be Kelcy Warren,
Mackie McCrea, Matt Ramsey and Tom Long,
respectively, and it is expected that Mike Hennigan and other members of the SXL management team will continue in leading management
roles of the combined company with the SXL
business headquartered in Philadelphia.
The news comes on the heels of the strategic
joint venture between Sunoco Logistics Partners
LP and ExxonMobil announced November 9. Per
the agreement, the companies will form Permian
Express Partners LLC to combine certain of their
key crude oil logistics assets. Sunoco Logistics
will contribute its Permian Express 1, Permian
Express 2 and Permian Longview and Louisiana
Access pipelines. ExxonMobil will contribute: its
Longview to Louisiana and Pegasus pipelines;
Hawkins gathering system; an idle pipeline in
southern Oklahoma; and its Patoka, Illinois
terminal.
Concurrent with the transaction, ExxonMobil
and its affiliates will enter into a preferred provider
agreement with the joint venture. Sunoco Logistics will be the majority owner and operator of
the joint-ventures assets. Upon closing, ownership in Permian Express Partners LLC will be approximately 85% SXL and 15% XOM.
WHITING PETROLEUM TO SELL
NORTH DAKOTA MIDSTREAM ASSETS
Whiting Petroleum Corp. has entered into purchase and sale agreements to sell its 50% interest
in its Robinson Lake natural gas processing plant
and associated natural gas gathering system
located in Mountrail County, North Dakota and
its 50% interest in its Belfield natural gas processing plant and associated natural gas, crude oil
and water gathering systems located in Stark,
Billings and Dunn Counties, North Dakota. From
April through September 2016, these plants had
average daily throughput of 132 MMcf per day.
An affiliate of Tesoro Logistics Rockies LLC has
agreed to purchase the assets for $700 million,
pending regulatory approval. Whitings share of
the sale price would be approximately $375 mil-
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:21 PM
MIDSTREAM NEWS
1612ogfj_15 15
BR I E F S
MARTIN,
VANDERHIDER JOIN
NOBLE BOARD
Noble Midstream Partners LP has appointed
Martin Salinas, Jr. as an
independent director on
the companys Board of
Directors, joining Hallie
A. Vanderhider. Vanderhider has served as an
independent director
since Noble Midstreams
IPO in September. With
the addition, Nobles
board consists of six
directors, including two
independent directors.
Salinas currently serves
as the CEO of Phase
4 Energy Partners Inc.
He previously served as
CFO of Energy Transfer
Partners LP. Vanderhider serves as managing
partner of Catalyst
Partners LLC. Prior, she
worked at Black Stone
Minerals Company LP,
serving most recently as
a member of the board
of directors and as president and COO.
15
12/5/16 1:21 PM
MIDSTREAM NEWS
B RIEFS
PAA COMPLETES
$750M SENIOR
NOTES OFFERING
Plains All American Pipeline LP has completed
an underwritten public
offering of $750 million
aggregate principal
amount of 4.500% senior
unsecured notes due
December 15, 2026, at
a public offering price
of 99.716% with a yield
to maturity of 4.535%.
Total net proceeds of the
offering were approximately $741.3 million.
The Partnership intends
to use the net proceeds
from the offering to
repay outstanding
borrowings under
its senior unsecured
revolving credit facility
and commercial paper
program and for general
partnership purposes.
J.P. Morgan Securities
LLC; BNP Paribas Securities Corp.; Merrill Lynch,
Pierce, Fenner & Smith
Incorporated; Wells Fargo Securities, LLC; BBVA
Securities Inc.; DNB
Markets, Inc.; and SMBC
Nikko Securities America, Inc. acted as joint
book-running managers
of the offering.
16
1612ogfj_16 16
1,400 construction workers and create 40 permanent jobs upon completion, as well as generate
$20 billion in economic activity in the first 13 years
of operation based on 2015 Impact Data Source
estimates.
ExxonMobils previously announced investments at Beaumont include expansion of the
refinerys crude refining capacity in 2015 and,
earlier this year, construction of a new unit to
increase domestic supply of ultra-low sulfur gasoline and diesel.
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:21 PM
POWER-GENNATURALGAS.COM
1612ogfj_17 17
PRESENTED BY:
12/5/16 1:21 PM
1612ogfj_18 18
DECEMBER 2016
12/5/16 1:22 PM
A Trump administration is clearly in favor of enhanced exploration and production of oil and gas as a tenet of energy, economic and national security policy. Some of President-elect
Trumps key advisors from Oklahoma oil producer Harold
Hamm to North Dakota Congressman Kevin Cramer have
espoused a bullish posture on oil and gas and shale development
in particular. Candidate Trump has said he would approve
Keystone XLfor a share of the profits. TransCanada said it
remains fully committed to building the pipeline and is looking
at ways to engage a future Trump administration on the projects
benefits. The market sees potential here as shares of TransCanada rallied the Wednesday after the election in response to
Trumps win.
Between the Keystone XL pipeline and the Dakota Access
pipeline, the environmental left has spent the past four years
building up pipeline protests as ground-zero in the fight against
fossil fuels. In many cases, these fights pitted the Democrats
environmental and union bases against each other and may
have contributed to union defections to Republicans in the
2016 election. For this reason, expect President-elect Trumps
domestic policy team to quickly make it clear that they intend
to expedite approval of energy infrastructure such as pipelines.
DECEMBER 2016
1612ogfj_19 19
12/5/16 1:22 PM
Continental Resources
drilling in the Bakken.
1612ogfj_20 20
Bakken, the Eagle Ford and the Niobrara, pad drilling is already
above 90%. Differences in drilling speed among shale plays is
a result of different targeted depths, lateral lengths, and number
of wells per pad. Further drilling efficiency is expected in all
plays particularly in the Permian Basin.
All main shale oil plays have increased the average lateral
length of the wells in 2016, except for the Bakken. The play
shows an average lateral length of 9,400 feet, the same as last
year. The Niobrara has seen the largest increase in lateral length
per well during this year, mainly due to longer laterals drilled
by Anadarko Petroleum, Noble Energy, Bill Barrett, and PDC
Energy. Such longer lateral wells have included more proppant
use per stage, which gives an indication of bigger stages, hence
more reservoir contact that ultimately results in more oil recovered. This case is more prominent in Permian Delaware
wells, which have had a moderate increase in lateral length
but a significant increase in proppant use per stage in the last
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:22 PM
Eagle Ford
Bakken
Permian Midland
100
Permian Delaware
US average
2016
90
2015
80
70
1,200
Feet/day
2014
60
%
1,000
50
800
40
600
30
400
20
200
10
0
2014
2015
2016
2013
2012
2011 and older
J M M J S N
2014
J M M J S N
2015
J M M J S N
2016
10,000
9,000
8,000
Feet
600
Eagle Ford
Permian Delaware
US shale oil average
7,000
6,000
5,000
2011
2014
2016
500
Thousand lbs/stage
Bakken
Niobrara
Permian Midland
+177%
400
300
200
100
4,000
3,000
2011
2012
2013
2014
2015
2016
Bakken
Eagle
Ford
Niobrara
Permian
Delaware
Permian
Midland
Source: NASWellCube
DECEMBER 2016
1612ogfj_21 21
21
12/5/16 1:22 PM
100
Rich gas
Light oil
1,000
90
80
70
800
60
600
Thousand boe
50
Bakken
Niobrara
Permian Midland
Eagle Ford
Permian Delaware
40
400
30
20
200
10
0
13 14 15 16
13 14 15 16
13 14 15 16
13 14 15 16
13 14 15 16
Bakken
Eagle
Ford
Niobrara
Permian
Delaware
Permian
Midland
0
2012
2013
2014
2015
2016
Source: NASWellCube
Permian Midland
54
100%
Indexed
breakeven
37
64
Permian Delaware
2014
2015
2016
48
34
62
Niobrara
47%
High grading
effect
45
37
Efficiency
improvements
72
Eagle Ford
Unit cost
change
57
39
2014
60
Bakken
40
31
2016
-30%
-10%
-13%
USD/Boe
Source: Rystad Energy research and analysis, NASReport, NASWellCube
mance are expected among all shale plays since they all have
a considerable inventory of undeveloped locations in the core
area.
The combination of increased efficiencies, lower unit well
costs, and high-grading during the last two years has led to a
decrease in breakeven prices of 47% on average since 2014
among all shale plays, as shown in Figure 4. All main shale oil
plays reached a wellhead breakeven price below 40 USD/bbl
during 2016 with Bakken wells having the lowest wellhead
breakeven at 31 USD/bbl.
Rystad Energy has quantified the different factors causing
the 47% drop in shale breakeven prices and found out that, on
average, 30% of the drop is due to lower unit costs and only
13% are attributable to efficiency improvements. Hence, Rystad
22
1612ogfj_22 22
Energy sees most of the recent cost reductions are highly cyclical, so in a high-activity scenario, well costs will quickly
revert towards 2014 levels.
ABOUT THE AUTHOR
DECEMBER 2016
12/5/16 1:22 PM
emerg
xploring
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and pro
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12/5/16 1:22 PM
OIL & GAS FINANCIAL JOURNAL: Rick, its been more than
two years since you were named president and CEO of WPX
Energy, and a lot has happened during that time. WTI prices
were about $107 a barrel when you started in 2014. They collapsed to as low as $26, and now oil prices are back up to near
$50/bbl. Through it all, you had to remain focused on your
objectives. Tell our readers how you did it and what the early
days were like when you were repositioning WPXs portfolio
and changing the companys culture.
RICK MUNCRIEF: Well, it started even before I got here when I
was considering whether to take over this role or not. It was evident
that WPX produced a lot of products, but the company didnt
make a lot of money. Company margins on a per-unit basis were
bottom quartile. So I felt we had some real opportunities to change
that.
Fundamentally, the most important thing was to transition
the portfolio away from natural gas to crude oil. We needed more
of a balanced mix, and at the time we were just 10% oil. So we
really needed to change that. Another thing I noticed, once I got
here, was that some of the assets were really burdened by some
long-term legacy contracts. We also had some assets in South
America and in some very, very marginal areas. So I felt we could
do some things that would change our assets and our product
mix for the better. We wanted to simplify the story and go from
seven or eight large assets to three. So we finalized our strategy
in the fall of 2014, just before the commodity price dropped
dramatically.
OGFJ: How did WPX get into this predicament?
MUNCRIEF: Well, the first thing is that there wasnt a strategy,
and thats always a problem. If you dont know exactly where youre
headed, all roads will get you there. So we worked very closely
with the board to set a strategy to create a balanced portfolio with
a preference for crude oil.
24
1612ogfj_24 24
OGFJ: In the first quarter of 2015, WPX was still mainly a natural
gas company with 70% of its assets weighted toward gas. A year
later in 1Q16, 62% of your assets were oil. How did you accomplish this in such a short time?
MUNCRIEF: The strategy that we laid out in the fall of 2014 told
us which assets we needed to remove from our portfolio, and we
went to work on that immediately. We started having some early
successes when crude oil prices dropped in late 2014 and early
2015, so that showed we had an opportunity to buy assets, but we
didnt know how long that window would be open. We didnt have
a crisis mentality. We were methodical because we were very well
hedged, which certainly helped as we went into the downturn.
We knew we needed to build inventory when the opportunity
presented itself. We started to look at the existing basins we were
in the Bakken and the San Juan but there were very limited
opportunities for the kind of assets we wanted. We also looked at
places like the Powder River Basin and the DJ Basin and the Eagle
Ford, and you always know that you want to be in the core. In
most cases, the core was pretty well taken. The Permian, on the
other hand, was at a point in its development cycle that presented
some opportunities. However, the Midland Basin looked like it
was fairly locked up and also pricey. But the Delaware Basin was
very intriguing to us. We decided this was definitely a basin we
wanted to be in. We looked at the geology and decided where we
would really prefer to be. Thats what led us to the central part of
the basin.
OGFJ: Tell us about the RKI acquisition.
MUNCRIEF: We closed the purchase of privately held RKI Exploration & Production in August 2015. In doing so, WPX gained a
substantial presence in the core of the Permians Delaware Basin
that included about 22,000 boe/d of existing production more
than half of which was oil; approximately 92,000 net acres about
98% of which is held by production; more than 5,500 gross risked
drilling locations across stacked pay intervals; and more than 375
miles of scalable gas gathering and water infrastructure.
This was a defining moment for our company. The Permian is
characterized by numerous stacked pay reservoirs, has an extensive
production history, long-lived reserves, and high drilling success
rates. The 92,000 acres represented more than 670,000 prospective
net effective acres of stacked pay. The 9,000-foot hydrocarbon-charged stratigraphic column includes the Wolfcamp, Bone
Spring, Avalon, and Delaware Sands intervals.
That transaction helped drive our high-margin oil growth,
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:22 PM
Photo by
Evan Taylor
Photography
DECEMBER 2016
1612ogfj_25 25
25
12/5/16 1:22 PM
1612ogfj_26 26
DECEMBER 2016
12/5/16 1:22 PM
OGFJ: Can you elaborate a little about what drew you to the
Permian Basin? What did you see that made the RKI acquisition
such a game-changer for WPX?
MUNCRIEF: There were three things. Number one was the resource. The amount of resources in the Permian is just incredible.
Number two was the business climate. Texas and New Mexico,
where the RKI assets were, both have a favorable business climate
for companies. The third thing was the infrastructure. There was
already a good start with existing infrastructure because the
Permian has been producing for about 100 years. I spent a large
part of my childhood and early years in that part of the country.
I recall riding up and down lease roads with my dad, and here we
are 50 years later driving on these same roads. When I look at the
depth of the inventory there and the technology were deploying,
I can see my grandkids 50 years from now engaged in the same
business. A couple of generations from now, there will still be a
lot of work to do in that basin.
OGFJ: Doesnt WPX have some gas assets in the Permian as
well?
MUNCRIEF: Yes, we have some associated gas produced there.
There is a strong market for it just across the border in Mexico.
Our exports to Mexico continue to grow. We also have strong
markets for natural gas in Arizona, Nevada, and California all
over the Southwest. When the LNG market fully develops, we
have great access to the Gulf Coast. Global demand for oil products
DECEMBER 2016
1612ogfj_27 27
12/5/16 1:22 PM
Permian Basin
Photo by Jim Bletcha/Courtesy of WPX
1612ogfj_28 28
DECEMBER 2016
12/5/16 1:22 PM
Williston Basin
Photo by Jim Bletcha/Courtesy of WPX
$60, thats when you start seeing real growth again. There has not
been a lot of capital going into international projects lately. The
number of rigs operating outside North America is way down.
Eventually, that will have an impact. Thats why it was so important
for the crude oil export ban to be lifted. One day we will have a
call on US shale, and we need to be prepared.
1612ogfj_29 29
Clay Gaspar,
Kevin Vann,
Chief Operating Chief Financial
Officer, WPX
Officer, WPX
Photos by Jim Bletcha/Courtesy
of WPX
OGFJ: Is there anything youd like to add that we havent covered here today?
MUNCRIEF: Just that our overall game plan is solid. We have a
session with our board every year in which we just talk about our
strategy. Weve done that for two years now. We like to get perspective from the investment community, so both years weve brought
in an existing shareholder to talk to our board about why they own
WPX. We also have brought in targeted shareholders someone
who has not yet pushed the buy button. I want our board to hear
why they havent bought in and to see if there are some common
denominators that will help improve our strategy going forward.
We have a very strong board, and this has been very well received
by board members and from the investment community as well.
OGFJ: Thanks very much for your time today, Rick.
29
12/5/16 1:22 PM
1612ogfj_30 30
DECEMBER 2016
12/5/16 1:22 PM
DECEMBER 2016
1612ogfj_31 31
takeaway capacity from the producing regions. Up until now, production growth has
been paced by takeaway capacity additions. In recent years, theres been a now familiar
patterntakeaway constraints followed by incremental takeaway capacity out of the
Northeast supply regions, which then are immediately followed by a surge in Marcellus/
Utica production and the need for more takeaway capacity, and so on. The impact of
constraints on production worsened after production surpassed demand through 2015
and the region became progressively more dependent on takeaway capacity out of the
region, including through the exceptionally mild winter of 2015-16. Between February
and October (2016), not only was there little expansion capacity added, but existing
takeaway capacity experienced some significant disruptions, which only contributed to
the supply volatility and declines. In early March, REX experienced a brief outage following
a mechanical issue at one of its receipt meters in Ohio, reducing overall Northeast production by 0.8 Bcf/d for a few days. This scenario recurred on a larger scale in mid-July
when REX began a planned maintenance to complete tie-in work related to its Zone 3
Capacity Enhancement expansion project. The week-long outage again reduced producF1: PA, OH, WV DRY GAS PRODUCTION
Bcf/d
25
20
2016
2015
2014
15
2013
10
2012
2011
2010
2009
1J
18 an
-J
a
4- n
F
21 eb
-F
9- eb
M
26 ar
-M
12 ar
-A
29 pr
16 Ap
-M r
a
2- y
J
19 un
-J
u
6- n
Ju
23 l
-J
9- ul
Au
26 g
-A
12 ug
-S
29 ep
-S
16 ep
-O
2- ct
N
19 ov
-N
6- ov
D
23 ec
-D
ec
Source: Genscape
NE PA
6.0
Bcf/d
5.0
4.0
3.0
2.0
WV
Bcf/d
3.5
2.5
Ja
n
Fe
Mb
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
N ct
o
Dv
ec
1.5
2014
2015
5.0
4.0
3.0
2.0
1.0
0
OH
Ja
n
Fe
Mb
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
c
N t
o
Dv
ec
4.5
SW PA
Ja
n
Fe
b
M
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
N ct
o
Dv
ec
8.5
8.0
7.5
7.0
6.5
6.0
Ja
n
Fe
Mb
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
c
N t
o
Dv
ec
Bcf/d
Bcf/d
2015 once winter demand subsided altogether. For full 2015, regional production
averaged 7.0 Bcf/d, down 0.3 Bcf/d from
2014, and has averaged barely higher than
thatabout 7.2 Bcf/din 2016 to date,
which is just 0.2 Bcf/d higher than the
December 2015 average.
SW PA (Figure 2 - top right graph) has
been somewhat more resilient, climbing
through 2014 and 2015, but this area too
has flattened out in 2016. The region peaked in late 2015 at just over 5.0 Bcf/d and
averaged 4.4 Bcf/d in 2015 (1.4 Bcf/d higher
than 2014). This year to date, its averaged
5.4 Bcf/d, 1.0 Bcf/d higher year on year but
again barely (just 0.3 Bcf/d) higher than
where it ended 2015.
WV (Figure 2 - bottom left graph)also
grew somewhat in 2015, up about 0.5 Bcf/d
to an average 3.5 Bcf/d. Regional production lingered more or less near 2015 levels
untila major disruption in mid-2016 (deep
valley in the black line) when severe flooding shut-in receipts, particularly onto Columbia Gas Transmission. Volumes recovered in short order and reached annual
highs in late summer 2016. But growth has
slowed since then and receipts are about
0.1 Bcf/d higher year on year through October, bringing the year-to-date average to
3.7 Bcf/d.
OH (Figure 2 - bottom right graph),
which primarily represents Utica Shale
production, has been the biggest driver of
Appalachia production growth in the past
couple of years, climbing from almost nothing in 2013 to 3.5 Bcf/d this year to date,
nearly level with West Virginia. That is up
1.3 Bcf/d year on year for the period, but
up just 0.2 Bcf/d from the December 2015
average. Volumes were in part thwarted
by capacity disruptions on Rockies Express
Pipeline (REX), particularly in July (more
on that below).
Several factors created additional headwinds for producers this year that exacerbated the slowdown compared to 2015.
For one, producers continued to lay down
rigs, particularly in Pennsylvania. Rig
counts started 2016 near 50 but were down
in the mid-30s by May and lingered there
through much of the summer. For another,
even if rig counts hadnt fallen, there was
the ongoing issue of constrained pipeline
Dec-15 Avg
2016
Source: Genscape
31
12/5/16 1:22 PM
tion by more than 1.0 Bcf/d. And in between those two events
was a surprise outage on Texas Eastern Transmissions (TETCO)
Penn-Jersey line in late April, when a rupture and explosion severed
flows through the lines Delmont compressor station in Westmoreland County, PA. The line flows primarily Marcellus production
receipts eastbound to the New Jersey market area. While the
majority of flows on the line were rerouted, the outage shut in
200-300 MMcf/d of Marcellus production in the area for an extended period. And, as mentioned previously, flooding in West
Virginia temporarily curtailed production from that state as well
in late June/early July.
More recently in late September/early October, the region
experienced another kind of constraint nearly full storage. For
a while there in late summer, it looked as if gas market economics
had wiped out the year-on-year surplus in storagelow gas prices
had incentivized the market to burn record amounts of gas for
power generation, the year-on-year storage surplus had come
down from about 1 trillion cubic feet (Tcf), and it looked like the
US storage inventory was going to narrowly escape last years
record high levels. But Mother Nature had something else in mind.
Weather forecasts for above-normal temperatures, which had
supported demand in the hotter months, lingered well into October,
when some demand for heating normally kicks in, particularly in
the northernmost states. That hit the Northeast supply regions
especially hard. Inventories at regional storage facilities marched
toward capacity limits, backing up supply in the pipelines and
ultimately back to the wellhead. After hitting an average 22 Bcf/d
in August, Northeast production by October 2 had dropped to a
2016 low near 20 Bcf/d. Despite falling production Northeast
natural gas spot prices for next-day delivery traded as low as $0.10/
MMBtu around that time, according to Natural Gas Intelligences
daily cash price index. A lot of the recent production declines in
the Marcellus/Utica have been related to short-term capacity
issuesstorage and pipelineexacerbated by mild weather. The
resulting supply congestion may continue to some extent in the
near-term, especially if mild weather persists, given that this is
also around when scheduled, mandatory withdrawals (i.e. ratchets)
kick in for some big Northeast storage facilities for the sake of
operational integrity, regardless of demand. But many of the capacity issues are likely to fade when winter hits and as more
pipeline-expansion projects come online.
Already since that low point in October, daily flows show
Northeast production volumes have bounced back somewhat to
near 22 Bcf/d as of early November as some heating demand has
shown up. (Heating degree days, or HDDs, in late October climbed
to above 100 in the Northeast region for the first time since midAprilabove-normal for this time of year.) Moreover, there are
other signs as well that Northeast producers potentially are gearing
up for another winter production surge. Rig counts in the three
growth states (Pennsylvania, Ohio and West Virginia) have creeped
back up since August and are above 50 combined as of the last
two weeks, according to the latest Baker Hughes rig count data,
which is in line with January 2016 counts. There are also several
expansion projects that have come online this fall or that are
32
1612ogfj_32 32
DECEMBER 2016
12/5/16 1:22 PM
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still reeling from a severe industry downturn which began in mid-2014. With a
significant crude price decline, M&A
activity slowed substantially from the
historically high levels of late 2013 and
the first half of 2014. Adjusting to the
lower-for-longer environment, oilfield
services companies have been stabilizing their balance sheets and right-sizing
cost structure. The sector landscape has
been changing, with signs of readiness
for corporate transaction activity. Energy executives are looking to deals as
a means to achieve scale, fill in portfolios or enhance capabilities. Their strategic options depend on the companys
liquidity, asset strength, and access to
capital markets. Though a wide bid-ask
spread, among other factors, hampered
getting deals done, the market is starting
to stabilize. Now, strategic buyers have
a leg up given their ability to justify higher premiums through synergies and offer
stock as a tax-advantaged transaction
currency.
MARKET SITUATION
The oil and gas (O&G) industry is renowned for its boom and bust cycles,
creating fortunes and wiping them away
equally as fast. The current downturn
feels particularly sharp as Brent crude
dropped 75% from $106/bbl in July 2014
to $26/bbl in January 2016. While prices
have recovered modestly (currently trading at around $51/bbl as this article goes
to print), market conditions remain
challenging as the low prices weigh on
sector performance. Demand for oilfield
services is weak in many parts of the
world, with a few exceptions of sustained areas of strength, namely the US
Permian basin and the Middle East.
Looking forward to the balance of
2016 and into 2017, the O&G market
recovery remains anything but certain.
34
1612ogfj_34 34
Nightman1965 | Dreamstime.com
Determination of OPEC suppliers to battle for market share, and resilience of North
American tight oil producers is yet to yield a victor. OPEC spare capacity is low and
capital is increasingly constrained as major producing countries continue running
high fiscal deficits. At the same time, distress is also taking its toll on North American producers, resulting in US domestic production drops of ~750K bpd in first
nine months of 2016. Global demand, while relatively strong in the past year, is
facing pressures in forms of slowing economic growth and fragile financial
systems.
Natural production declines will likely result in a ~20 MMBOE supply gap by
2020. Most of the capital is expected to flow to OPEC, Russia and China, with the
balance going to shale and pre-funded deepwater, based on relative play economics.
The capital efficiency battle is expected to occur between shale and deepwater over
time, and will likely lead to a need for higher levels of industry collaboration and
integration.
The resounding theme across companies in the service space is a relentless focus
on preserving cash flow by undertaking significant operating and capital cost reductions, and fighting to maintain market share. This unique time in the industry
presents opportunities for the healthier companies to pursue strategic acquisitions
or partnerships as, despite the uncertainty, these companies can re-focus their
capability-aligned value proposition by engaging in corporate transaction
activity.
SECTOR TRANSFORMATION UNDER WAY
Service companies who previously focused on speed and effectiveness, must now
compete to lower their customers cost per barrel. Significant cost reduction and
efficiency gains resulted in drilling costs and rig count declining to a nearly 10-year
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:22 PM
DECEMBER 2016
1612ogfj_35 35
390
380
$375
350
$381
$380
$373
370
300
$362 $362
360
250
$352
350
200
$342
340
150
$335 $333
$328
330
100
320
400
50
310
300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q316
TYD
Top player
11%
12%
9%
6%
19%
17%
10%
20%
18%
33%
16%
50%
11%
31%
11%
7%
24%
25%
11%
16%
17%
10%
4%
7%
18%
15%
7%
9%
8%
7%
12%
11%
40%
24%
Other
6%
12%
34%
38%
31%
14%
Top 10
9%
33%
39%
16%
26%
14%
Top 5
16%
18%
29%
44%
Top 3
12%
14%
44%
30%
7%
34%
44%
43%
15%
16%
10%
11%
15%
15%
19%
11%
2008 2014
2008 2014
2008 2014
2008 2014
2008 2014
2008 2014
Pressure
pumping
Coiled
tubing
Offshore
drilling
Completions
equipment &
services
Drilling
fluids
Land
drilling
If this market bias persists, the oilfield services sector may gravitate towards a
super-competitor structure. Super-competitors are companies that develop a clear
idea of what the company does best and how it creates value. They focus their
investment on the capabilities in support of this idea. Their advantaged position
is often achieved by sharper customer focus, a drive for innovation and ability to
gain scale in their specific markets. In oilfield services, super-competitors will likely
be large-scale category leaders who can use technology to create a defensible position, build a cohesive platform organically or through acquisitions, and apply
capital discipline to maintain portfolio excellence.
These changes resemble those which occurred in previous downturn cycles and
yielded large service specialist companies. The thesis of specialist consolidation
produced outstanding shareholder value creation for many years. Companies focused on internal capabilities while building a portfolio of products and services
to address customer needs are more likely to be rewarded by the market compared
to the players that are all things to all people.
The overall M&A market for oilfield equipment and services through 3Q16 re-
35
12/5/16 1:22 PM
Regional diversified
players
Integrated service
providers
Product/Services
Single category
Multiple categories
Full suite
Regions
Global
Multiple regions
Global
Customers
E&P, IOC
Relatively high
tech
Moderate capital
requirements
Differentiated
technology
Differentiated
service
Premium price
Characteristics
Annualized TSR
(2012-2015)
+12%
-13%
+1%
mains muted relative to 2014 activity, as market participants have been largely
sidelined due to a large bid-ask spread, volatility in commodity prices, lack of acquisition capital, and continued uncertainty about the timing and shape of the
recovery. Average quarterly deal volume from 1Q15 to 3Q16 is down 45% from
2013-2014 as shown in Figure 3. In 2016, the select deals that are getting done are
market defensive reactions, while companies with clean balance sheets are looking
for consolidation opportunities or product adjacencies.
POSITIONING, DEALS STRATEGY
In light of the changing landscape ahead, now is the time for oilfield services companies to review market positioning. Consolidation activity is expected to take
many forms: mergers to gain economies of scale, strategic acquisitions to gain
critical mass or technologies in specific categories, and nontraditional forms such
as joint ventures and strategic alliances to access the above mentioned benefits in
a difficult capital market environment. What is the right strategy for oilfield service
companies in todays market?
To avoid the common pitfalls that plague transactions, successful dealmakers should
consider several key factors: How are we positioned today and which capabilities do
we need to enhance or obtain in order to deliver the winning value proposition to
our customers?
F3: AVERAGE QUARTERLY DEAL VOLUME FROM 1Q15 TO 3Q16
13
12
40
35
Halliburton/
Baker Hughes
deal
11
25
10
5
0
7
6
15
16.0
11.1
6.9
6.1
2.7
12
10
30
20
14
0.4
1.6
1.3
1.7
4
1
0.1
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
Number of deals
45
36
1612ogfj_36 36
WWW.OGFJ.COM
DECEMBER 2016
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59
61
135
216
180
200
290
460
506
640
535
452
589
584
572
485
1272
948
Number of deals
Stock
Mix2
50%
Cash
0%
100%
$161
$99
$86
$88
$38
$25
$55
$136
$161 $153
$94
$106 $140
$143 $154
$95
$693 $541
Stock
Cash
50%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
1612ogfj_37 37
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1612ogfj_38 38
DECEMBER 2016
12/5/16 1:22 PM
1612ogfj_39 39
12/5/16 1:22 PM
1612ogfj_40 40
DECEMBER 2016
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further reduce costs. This highlights how industry-wide standardization can lead to cost savings while also simplifying field
development.
Another example of an independent reworking the development concept of a stalled field and steering it back on track is
Anadarko, having assumed the operatorship of the Constellation
field, also in the Gulf of Mexico. The field (previously called
Hopkins) was operated by BP, which envisioned a semi-sub
development that proved uneconomic at current oil prices. As
a result, Anadarko took over as operator and announced recently
that it intends to develop the field as a tieback to its Constitution
spar.
It is important to note that operators are sometimes faced
with regulatory and political limitations in the selection of the
cheapest development option possible. An example of such a
project is the Abadi gas field, where the Indonesian government
favored an onshore liquefaction development as opposed to
Inpexs preference for a 2.5-mmpta floating liquefaction unit
for the initial development phase. A development plan is expected to be submitted later this year which will utilize an
onshore plant.
One of the key reasons for the oil price collapse was the
dramatic change in output from the US, which went from being
a major importer to being self-sufficient due to the revolution
in shale production. However, US unconventional production
is typically more expensive than conventional onshore production, with higher drilling and completion costs compared to
that for conventional. As a result, this sector has been particularly hit hard by the oil price crash, with a large number of
companies going bankrupt and others cutting back on drilling
activity. The US land drilling market is particularly susceptible
to fluctuations in commodity prices, with drilling activity having
been significantly reduced as a result of the downturn.
Despite this, output remains relatively high from the most
productive basins, and a focus on efficiency and innovation has
led to better returns. This is due to the fact that drilling and
completion (D&C) and estimated ultimate recovery (EUR) costs
120
100
100
80
60
40
20
0
2012
DECEMBER 2016
90
80
70
60
50
2013
2014
2015
1612ogfj_41 41
have come down substantially, with a number of factors responsible for this.
A reflection of how the US rig market has been affected is
indicative in the Baker Hughes rotary rig count reported in May
2016, with active rig numbers at the lowest point on record at
374 active rigs. This has driven equipment and land rig costs
down dramatically. However, there are signs the market is
improving, with the latest active rig numbers on an upward
trend to 513 active rigs reported in mid-October, a 37%
increase.
In the current oil price environment, DW250 Capital Cost
Briefing analysis shows that development CAPEX per barrel for
deepwater projects declined substantially by 41% over the
2012-2016 period, while the US shale D&C cost per barrel also
declined by 36% over the same period.
As the market begins to recover, some of these cost savings
will inevitably unwind. However, the opportunity to develop a
fresh approach to offshore engineering and project delivery
could have long-lasting implications for project costs and predictability.
2016
40
2012
Deep water
Shallow water
Onshore
US shale
2013
2014
2015
2016
12/5/16 1:22 PM
1612ogfj_42 42
DECEMBER 2016
12/5/16 1:22 PM
Diesel
718 652
1 OECD Americas
4 CIS
Gasoline
Gasoline
Diesel
Diesel
897 835
984 995
469 528
-1057
145
-1592
-205
3 Middle East
Gasoline
Diesel
1023
6 Latin America
Gasoline
Diesel
702
-471 -526
7 Africa
762
5 Asia-Pacific
Gasoline
Diesel
1280
358
469
-559 -548
Gasoline
-143
Diesel
-332
-974
-657
-998
-1490
The Middle East and CIS are likely to strengthen their positions as net exporters,
while Europe, Latin America, Asia-Pacific countries and Africa will import more.
Notes: Positive numbers indicate net export potential, negative numbers net import
requirements. 2013 net exports do not equal imports due to feedstock trade and
product classification differences.
Sources: US Energy Information Administration, OPEC 2015 World Oil Outlook, Bain analysis
1612ogfj_43 43
12/5/16 1:22 PM
AUTHENTICITY OF INTRINSIC
VALUE-AT-RISK
1612ogfj_44 44
0.08
Normalized
0.06
0.04
0.02
0.00
500
1000
1500
2000
2500
3000
3500
BOPD
Note: Dashed lines show the fit of different theoretical models, Normal, Log-Normal, and Stable distributions.
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:22 PM
140
120
Frequency
100
80
60
40
20
0
1000
2000
3000
4000
BOPD
POSSIBILITY OF BREAKTHROUGH
1612ogfj_45 45
6000
7000
80
Frequency
EQUILATERAL PORTFOLIO
5000
60
40
20
0
-1.0
-0.5
0.0
Returns
0.5
1.0
1.5
Note: Returns generated from bottom-up well economics modeling of equilateral portfolio using
production from individual wells and calibrated breakeven of each asset. Superimposed dashed lines are
value-at-risk (VaR) at different confidence levels. Using different portfolio weights, the shape of returns
distribution will be different.
Data source: Rystad Energy
combination.
As an iterative process, the hybrid approach also facilitates communication
within an organization connecting strategy to execution. With the ability to interact
with financial, operational and technical data, hybrid approach helps organizations
break down silos. Bring together stakeholders to solve a complex problem collaboratively and focus on return naturally.
SEEKING ALPHA PORTFOLIO
Hybrid approach paves the way to seeking alpha portfolio and hedging strategy.
45
12/5/16 1:22 PM
First, we partition the return-volatility space into four quadrants (Figure 4) and
display the efficient frontier (e.g., at desired return, unique set of weights that minimizes portfolio volatility). Think of it as the envelope or outer boundary of all
possible portfolios with different sets of weights.
Next, we perform Monte Carlo simulation of all possible portfolios track their
return and volatility. Like astronomers scanning the night sky for distant galaxies
and black holes, we extract the galactic center of gravity by taking average portfolio
Note: Clockwise are quadrant 1 NW, quadrant 2 NE, quadrant 3 SE, to quadrant 4 SW.
-0.30
0.0
-0.45
-0.2
Sharpe ratio
Expected return
-0.15
0.2
-0.60
-0.4
-0.75
-0.6
0.2
0.3
0.4
0.5
0.6
0.7
Expected volatility
0.8
0.9
1.0
Quadrant by average
Portfolio weights
1.0
0.8
Comfort
Stars
Dogs
Problem child
0.6
0.4
0.2
Portfolio weights
0.0
1.0
0.8
0.6
0.4
0.2
0.0
Note: Bar charts show the average portfolio weights of all the portfolios that fall within each quadrant.
46
1612ogfj_46 46
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:22 PM
Sharpe ratio
Expected return
-0.60
-0.4
-0.75
-0.6
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Expected volatility
Note: Yellow triangle represents equilateral portfolio, green star a desired destination, and red triangle
some arbitrary portfolio. Anchor points on the efficient frontier are the minimum-variance portfolio
(yellow star) and Sharpe portfolio (red star).
CONCLUSION
1612ogfj_47 47
Financial assets
profit & loss (%)
VaR (90%)
-2.64%
-3.40%
VaR (95%)
-3.42%
-3.96%
VaR (99%)
-4.89%
-4.60%
VaR (99.9%)
-6.53%
-4.87%
Note: Comparison of VaRs from an actual diversified investment portfolio and that from
our portfolio of producing assets in South Texas.
ACKNOWLEDGEMENT
We thank Andrew Conacher of Rystad Energy for providing the data used in model
calibration and VaR analysis.
ABOUT THE AUTHORS
47
12/5/16 1:22 PM
The new rules apply to oil and gas companies, but also more broadly to resource
extraction issuers, which includes all US
48
1612ogfj_48 48
and foreign companies engaged in the commercial development of oil, natural gas, or
minerals that are required to file SEC Form 10-K annual reports. The requirements
also cover the subsidiaries or affiliate entities included in a reporting companys consolidated financial filings. Subject companies must disclose information about the type
and total amount of payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments
made to each government, among other details.
Under Rule 13q-1, commercial development is defined as exploration, extraction,
processing, and export, or the acquisition of a license for any such activity. Project
means operational activities that are governed by a single contract, license, lease,
concession or similar legal agreement that forms the basis for payment liabilities with
a government.
A payment or series of related payments must amount to at least $100,000 during
the same fiscal year to fall under Rule 13q-1. Payment includes taxes; royalties; fees,
including licensing fees; production entitlements; bonuses; dividends; payments for
infrastructure improvements; in-kind payments; and if required by law or contract,
community and corporate social responsibility (CSR) payments.
Rule 13q-1 includes two targeted exemptions. The first provides transitional relief
for companies that acquired an entity not previously subject to the final rules and allows
them to delay reporting payment information for the acquired company until the first
fiscal year following the acquisition. The second exemption provides a one-year delay
in reporting for payments made in connection with exploratory activities, which was
intended to address concerns from the API about the potential competitive harm that
could be caused by disclosing payments to local governments in connection with
high-potential exploratory territory and other commercially sensitive information.
The rule also permits the SEC to provide relief from the requirements of the rules on
a case-by-case basis; for example, where the required payment disclosure is prohibited
under the host countrys laws.
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:22 PM
Under the Rule 13q-1 reporting regime, oil and gas companies
will likely see an increase in voluntary disclosures and investigations under the FCPA due to the rules anti-evasion
provision.
The FCPA prohibits corrupt payments to foreign officials
and political parties for the purpose of obtaining or retaining
business, securing an improper business advantage, or influencing or inducing an official act by the official or political
party. But the FCPA does not impose a mandatory disclosure
requirement on such payments unless they are deemed
material.
Rule 13q-1s anti-evasion provision captures payments that
are related to the commercial development of oil, natural gas
or minerals but are structured to avoid disclosure. This includes
payments intended to benefit individual government officials.
For example, payments for government expenses, providing
jobs or tuition to persons related to government officials, and
CSR payments to foundations or charities that are favored or
controlled by government officials must all be disclosed if
made to further the commercial development of oil, natural
gas or minerals. In describing the anti-evasion provision, the
SEC recognized that it captures such payments to individuals
and referenced a case study that highlighted the role that
resource extraction companies play in facilitating the suspect
or corrupt practices of foreign officials seeking to divert resource extraction payments that belong to the government.
Because the rule requires oil and gas companies to disclose
payments to individuals that are related to the commercial
development of oil and gas, it will impact the way oil and gas
companies respond to FCPA issues. Typically, when companies
discover an FCPA issue, they conduct an analysis of several
factors to determine whether to voluntarily disclose, and
likelihood of disclosure is usually one of those factors. If the
issue in question involves a payment to an individual related
to the commercial development of oil or gas that will have to
be disclosed under Rule 13q-1, the company will likely feel
compelled to also disclose that payment to the DOJ and SEC.
In addition to increased voluntary disclosure under the
FCPA, US enforcement authorities may use Rule 13q-1 disclosures as leads to investigate possible corruption. Rule 13q-1
is aimed at detecting and preventing corruption, and is thus
a natural source of evidence for FCPA enforcement agencies.
In fact, in issuing Rule 13q-1 and defending the decision to
require project-level reporting, the SEC referenced its experience in implementing the FCPA and explained that disclosed
data could help citizens, civil society groups, and others to
identify payment discrepancies that reflect potential corruption and other inappropriate financial discounts.
For Royal Dutch Shell, the first company to report under
The Reports on Payments to Governments Regulations 2014
in the United Kingdom, a civil society group has already raised
questions about the contents of its report. A review of the
Royal Dutch Shell report by the organization Publish What
DECEMBER 2016
1612ogfj_49 49
You Pay revealed that the value of an in-kind production entitlement payment to the Nigerian government for the SPDC
East project ($20.89 per barrel) was less than half of the average
values for other Nigerian payments in kind ($51.59 per barrel).
There are likely many legitimate explanations for this discrepancy, but for an eager investigator, it might be just enough to
launch an inquiry into how the in-kind payment was valued
and whether the official in charge of the SPDC East project
was improperly influenced to accept a lower value.
Payments made through third parties, particularly CSR
payments to foundations or charities, are also likely targets
for US enforcement agencies. To the extent there is corruption
involved with a project, the disclosure of these payments will
provide investigators with information that could lead to the
detection of such corruption.
OIL AND GAS COMPANIES
SHOULD BEEF UP COMPLIANCE
Finally, Rule 13q-1 will likely lead to increased FCPA compliance. As the SEC noted in issuing the rule, reporting project-level data related to payments to governments may also
discourage companies from either entering into agreements
that contain suspect payment provisions or following government officials suspect payment instructions.
In preparing for compliance with Rule 13q-1, companies
should begin a regular review of payments that may need to
be reported under the rules anti-evasion provision, including
auditing projects involving payments to governments and
reviewing any third-party relationships related to those projects. In addition, oil and gas companies should consider reexamining existing corruption compliance policies and procedures and investigating any other red flags raised in
completing projects related to commercial oil and gas development.
ABOUT THE AUTHORS
12/5/16 1:22 PM
1612ogfj_50 50
Left to right: Bobby Tudor, chairman of the new TPH and a member of the executive committee of PWP; Maynard Holt, CEO of the new TPH; and Dan Pickering, president and chief
investment officer of the energy asset management business. Photo by Syvester Garza.
in North America, the respect it has earned in the industry, and its leadership and
strong voice in Houston. This combination will enable us together to build further
on the great achievements of TPH. We believe TPHs strong suite of asset management
strategies and solutions are poised to benefit from recovery in the energy market and
well-suited to drive further growth and value for investors. The combination also adds
TPHs securities business, renowned for its deep domain research and thought-leadership, which will strengthen our ability to provide industry knowledge. We are excited
to work together to better serve our clients.
TPH will continue as it is today fast moving, knowledgeable, creative, and specialized, added Steel. With deep roots in Texas and the energy industry, we are
dedicated to furthering TPHs strong and distinctive commitment to Houston, the
energy capital of the world.
Bobby Tudor, TPHs chairman and CEO, commented, Perella Weinberg Partners
has a terrific reputation as a trusted advisor to executives at the worlds leading corporations and a culture of superior client service. We believe our clients and employees
will benefit meaningfully from a TPH with broader global reach, expertise in new
areas, and greater access to capital. Our longstanding personal and professional relationships with PWPs leadership team give us great confidence that the two firms
will be even better together. We look forward to partnering with [PWP] and are eager
WWW.OGFJ.COM
DECEMBER 2016
12/5/16 1:22 PM
1612ogfj_51 51
12/5/16 1:22 PM
DEAL MONITOR
Buyer
Seller
Value
($MM)
Asset Location
Deal Type
O/G
8-Nov-16
Earthstone Energy
$299
Corporate
Oil
31-Oct-16
Occidental
PLS Confidential
$1,765
Property
Oil
31-Oct-16
Anadarko
$1,000
Property
Gas
25-Oct-16
EQT
$513
Corporate
Gas
24-Oct-16
WildHorse Resources
Clayton Williams
$400
Property
Oil
20-Oct-16
Tug Hill
Stone Energy
$360
Property
Gas
18-Oct-16
SM Energy
QStar
$1,600
Corporate
Oil
18-Oct-16
Oasis Petroleum
SM Energy
$785
Property
Oil
Total
$6,722
Buyer
Seller
Value
($MM)
Asset Location
Deal Type
Asset Type
16-Nov-16
Cone Midstream
$248
US: Marcellus
Dropdown
Gas Gathering
Pipeline: Gas
1-Nov-16
TransCanada
$915
US: Diversified
Corporate
31-Oct-16
Dominion Resources
$1,725
US: Rockies
Dropdown
Pipeline: Gas
25-Oct-16
$738
US: Louisiana
Corporate
Gas Processing
20-Oct-16
NuStar Logistics
$107
Asset
Oil Storage
Total
$3,733
52
1612ogfj_52 52
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DECEMBER 2016
12/5/16 1:22 PM
DEAL MONITOR
Buyer
Seller
Value
($MM)
Asset Location
Deal Type
17-Nov-16
Spartan Energy
ARC Resources
$522
Canada: Saskatchewan
Property
Oil
16-Nov-16
Genesis Energy
$119
New Zealand
Property
Gas
16-Nov-16
OMV Group
$875
North Sea: UK
Acreage
Oil + Gas
14-Nov-16
Strata-X Energy
$5
Botswana
Acreage
CBM
2-Nov-16
Spur Resources
$305
Canada: Saskatchewan
Corporate
Oil + Gas
31-Oct-16
Undisclosed
RMP Energy
$85
Canada: Alberta
Property
Oil + Gas
24-Oct-16
Cooper Energy
Santos
$62
Australia
Property
Gas
20-Oct-16
Tourmaline Oil
Shell
$1,037
Canada: Alberta
Corporate
Gas
Total
O/G
$3,010
Buyer
Seller
Value ($MM)
Asset Location
Deal Type
Asset Type
14-Nov-16
Rubicon Oilfield
Top-Co Holdings
Undisclosed
US: Texas
Corporate
31-Oct-16
Baker Hughes
$33,900
US: Diversified
Corporate
27-Oct-16
Undisclosed
US: Texas
Corporate
Water Handling
26-Oct-16
Akastor
$145
Norway
Corporate
Production Services
17-Oct-16
Dril-Quip
TIW
$143
US: Texas
Corporate
Total
DECEMBER 2016
1612ogfj_53 53
$34,188
53
12/5/16 1:22 PM
INDUSTRY BRIEFS
1612ogfj_54 54
DECEMBER 2016
12/5/16 1:22 PM
INDUSTRY BRIEFS
1612ogfj_55 55
12/5/16 1:22 PM
INDUSTRY BRIEFS
what can help define its STACK position, the economics, and
potential in the play.
MAVERICK DRILLING & EXPLORATION CHANGES
NAME
Maverick Drilling & Exploration Ltd. has received shareowner
approval to change its corporate name to Freedom Oil & Gas
Ltd., effective November 7, 2016. The companys common
stock will trade on the Australian Stock Exchange under the
new trading symbol FDM beginning on November 10, and
in the US on the OTCQX under the symbol FDMQF beginning on November 14. Changing our name to Freedom Oil
& Gas formalizes a close out of the past activities of the
company and its history. We have transitioned from being a
drilling contractor and small producer to an early stage development-focused, E&P company, stated J. Michael Yeager,
chairman and CEO. Going forward, the company plans to
develop acreage acquired in the Eagle Ford Shale.
NYSE ACCEPTS BASIC ENERGYS
CONTINUED LISTING PLAN
The New York Stock Exchange has accepted Basic Energy
Services Inc.s plan for continued listing on the NYSE. As a
result, Basics common stock will continue to be listed on the
NYSE, subject to quarterly reviews by the NYSE to monitor
the companys progress against the plan to restore compliance
with continued listing standards. The NYSE had notified Basic
on August 19, 2016 of non-compliance with the market capitalization and share price continued listing standards. Basic
has a period of six months from the date of the NYSE Notice
to regain compliance with the minimum share price criteria
by bringing its share price and thirty trading-day average
share price above $1.00. Basic has also a period of 18 months
from the date of the NYSE Notice to regain compliance with
the market capitalization requirements of the NYSE listing
standards. Should the companys average global market
capitalization over a consecutive 30 trading-day period fall
below $15 million, the NYSE will promptly initiate suspension
and delisting procedures.
WELLDOG PLANS JV TO DEVELOP CBM
FIELDS WITH SHAANXI ENERGY INSTITUTE
WellDog, an energy-focused technical services company, has
signed a Letter of Intent to form a joint venture with the
Shaanxi Provincial Institute of Energy Resources and Chemical
Engineering (SPIERCE). The joint venture will deploy reservoir,
production and development technologies to demonstrate
profitable coal bed methane (CBM) development in fields
located within the Shaanxi province, one of Chinas most
prolific energy resource regions. Chinas CBM resource is
estimated at nearly 40 trillion cubic meters (tcm), with recoverable reserves of about 10 tcm. Over the last few decades,
China has dramatically increased investment in CBM technol56
1612ogfj_56 56
DECEMBER 2016
12/5/16 1:22 PM
INDUSTRY BRIEFS
1612ogfj_57 57
12/5/16 1:22 PM
PENNWELL
PETROLEUM
PETR
ROLEUM
M BOOKS
PennWell Books publishes technical & nontechnical books for the petroleum industry.
Written by selected industry experts, PennWell Books will help you broaden your
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quick-glance references as topics arise in your daily routine, and make excellent
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ORDER
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Visit www.pennwellbooks.com or call 800-752-9764
1612ogfj_58 58
12/5/16 1:22 PM
ENERGY PLAYERS
1612ogfj_59 59
Ortwein
Koeppen
Upton
Kanvik
Hartung
Ham
59
12/5/16 1:23 PM
ENERGY PLAYERS
60
1612ogfj_60 60
DECEMBER 2016
12/5/16 1:23 PM
ENERGY PLAYERS
1612ogfj_61 61
firms Houston office and lead all facets of the firms expanding
presence in infrastructure and energy services sectors. Previously, Churman served as a principal consultant at Morrissey
Goodale, a consulting and advisory firm, where he advised
AEC clients on M&A and corporate strategy.
PACIFIC EXPLORATION & PRODUCTION
NAMES McALLISTER CFO
Following a restructuring, Pacific Exploration & Production
Corp., a Canadian-based explorer and producer of natural gas
and crude oil, has named Columbian oil and gas executive
Camilo McAllister as CFO. Jim Latimer, previously the chief
restructuring officer at Pacific, will be appointed interim president and CEO while the board, assisted by executive search
firm Spencer Stuart, completes the process to select a permanent replacement. Pacific has implemented a strategy to narrow
its geographic focus to Colombia and Peru. The company sold
its Brazilian assets and suspended its expansion into
Mexico.
32 DEGREES CAPITAL APPOINTS MANAGING PARTNER
32 Degrees Capital has named Trent Baker as a managing
partner. Baker will lead the deal team in sourcing, due diligence,
and investment monitoring. Baker has been with the firm for
nine years in progressively senior roles encompassing various
aspects of portfolio management and firm operations. Founded
in 2004, 32 Degrees Capital is an oil and gas focused private
equity firm based in Calgary, Canada.
BNK PETROLEUM APPOINTS
NEUHAUSER AS DIRECTOR
BNK Petroleum Inc. has named David Neuhauser as a new
director of the company. Neuhauser is founder and managing
director of Livermore Partners based in the Chicago suburb
of Northbrook, Illinois.Livermore Partners LLC is a private
investment firm serving institutions, high-net worth individuals
and private equity sponsors. Neuhauser has extensive experience in capital markets and M&A activity and has over 20
years of experience in strategic investments including oil and
gas. Prior to founding Livermore, Neuhauser was founder and
president of Loren Holdings Inc., a company focused on strategic investments across a broad group of industries. Neuhauser
received his BA with concentrations in Economics from Northeastern Illinois University and has conducted Graduate studies
in Economics and Sociology from Roosevelt University of
Chicago. He is a current board member of TSX Venture Exchange listed Mitra Energy Inc.
INDUSTRY VETERANS JOIN AMPHORA TEAM
Amphora Inc., a global provider of commodity trading and
risk management software solutions, has made additions to
its team in both the US and Europe. Joining Amphoras London
office are Neil Sanghrajka as Head of Professional Services
61
12/5/16 1:23 PM
ENERGY PLAYERS
EMEA/APAC and Mark Valentine as Senior Pre-Sales Consultant. Sanghrajka joins Amphora from Allegro Development
where he was Director of Professional Services in EMEA. Before
joining Allegro, he had similar responsibilities at SunGard
Energy and originally came from the management consultancy
industry. Valentine joins Amphora following many years at
OpenLink and before that SolArc, where he helped start the
companys international business. Joining Amphoras Houston
office are Celia Dyer and Rachel Lowe. Prior to Amphora, Dyer
was a Product Manager at both Calypso Technology and Triple
Point Technology. Lowe joins from Lyland Associates, a consultancy she founded that focused on energy trading and risk
management and business process re-allignment.
SINOCHEM NAMES NEW PRESIDENT
In early November, China appointed Zhang Wei as president
of Sinochem Group. The appointment was decided by relevant
government departments.
HUTCHINGS ASSUMES CHAIRMANSHIP OF OKOGA
At the recent one-day annual meeting of The Oklahoma Oil
and Gas Association in Oklahoma City, OK, association members elected Wade Hutchings as chairman. Hutchings, who
serves as regional vice president of Mid-Continent Assets for
Marathon Oil, succeeds Rand Phipps, who had served as
OKOGA chairman since 2007. Phipps serves as senior vice
president, secretary, general counsel and COO of Mustang
Fuel Corp. He will remain on the board of directors.
ENERGY NAVIGATOR ENGINEER NAMED TO SPE
DISTINGUISHED LECTURER LINE-UP
Randy Freeborn, chief research engineer with Energy Navigator,
has been asked to share his expertise in Type Well creation
with international audiences as an SPE Distinguished Lecturer
for 2016-17. Freeborn is a petroleum engineer with over 40
years of experience. Every year, SPE (The Society of Petroleum
Engineers the largest individual-member organization serving
upstream oil and gas managers, engineers, scientists, and
other professionals worldwide) selects a group of experts to
share their expertise with Society members through lectures
given at local SPE section meetings. The lectures cover a variety
of critical topics for the energy industry.
PETROFAC NAMES NEW CFO
Alastair Cochran joined Petrofac Ltd., the international oil and
gas facilities service provider, in October, formally suceeding
Tim Weller as the companys CFO and executive director.
Weller left the group in October to take up the role of CFO
of G4S plc. Alastair joined Petrofac from BG Group plc, where
he was most recently Transition Head of BG Global Strategy
& Business Development overseeing the integration of BG
Group following its acquisition by Royal Dutch Shell plc. Prior
to that Alastair was Group Head of M&A and Corporate Finance
62
1612ogfj_62 62
DECEMBER 2016
12/5/16 1:23 PM
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
32 Degrees Capital
7 Mile Advisors
ABV AMRO Capital USA LLC
Aker BP
Allegro Development
American Petroleum Institute
Amphora Inc.
Anadarko
Anadarko Petroleum
Antero Resources
Arthur Andersen
Australian Stock Exchange
Bain & Co.
Baker Hughes
Bank of America Merrill Lynch
Basic Energy Services Inc.
BBVA Securities Inc.
Bell & Associates Ltd.
Bentek Energy
BG Group
Bill Barrett
Black Stone Minerals Co. LP
Blackstone
Blueknight Energy Partners LP
61
61
54
12
61
48
61
53
20,41,54
53
62
56
42
41,53
54
56
16
61
32
53,62
20
15
53
59
IFC
Bluewater Energy
BNK Petroleum Inc.
BNP Paribas Securities Corp.
Bold Energy III LLC
Boston Consulting Group
BP
Bracewell LLP
Brigham
Burlington Resources
C&J Energy Services
CaixaBank
Caltex Australia
Calypso Technology
Cameron LNG
Capital One Securities
Castleton Commodities
International LLC
Catalyst Partners LLC
Centennial
Chemeor Inc.
Chevron
Clayton Williams Energy
Cleco
CNOOC
Columbia Pipeline Group
Comision Federal de Electricidad
Concho Resources Inc.
ConocoPhillips
Continental Resources
Credit Suisse First Boston
Crestline Investors
Deloitte
Devon
DNB markets Inc.
DOJ
Dominion Midstream Partners
Dominion Resources
Dominion Transmission Inc.
Double Eagle Energy Lone Star LLC
Double Eagle Energy Permian LLC
Douglas-Westwood
Drillinginfo
DECEMBER 2016
1612ogfj_63 63
53
61
16
55
59
41,57
18,54
51
26
51
16
62
62
60
15
53,54
15
51
60
11,40
52
51
51
62
16
54
11,26
20,26
62
56
59
51
16
49
16,53
53
32
54
54
40
55
COMPANY
Dril-Quip Inc.
Duff & Phelps
Earthstone Energy Inc.
Ecofys
Ecopetrol SA
El Paso Exploration
El Paso Pipeline Partners
Emerald Oil Inc.
Enbridge
Encana
EnCap Investments LP
Energy Navigator
Energy Transfer Partners
Energy Ventures
ENERGYNET
COMPANY/ADVERTISER INDEX
PAGE
55
61
55
55
57
26
51
56
53,59
51
55
62
14,53
10
13
Ensco
EPA
EQT
Evaluate Energy
Evercore Group LLC
Evercore ISI
EXCO Resources Inc.
Extraction Oil & Gas
ExxonMobil
EY
Felix
FERC
Fir Tree Partners
11
18
32,53
6
16
11
60
51
14,59
59
51
14,32
56
FLOTEK INDUSTRIES
IBC
COMPANY
PAGE
Maquarie
Marathon Oil
Marlin Midstream Partners LP
Maverick Drilling & Exploration Ltd.
Mayer Brown
McKinsey & Company
Merrill Lynch
M-I SWACO
Milbank, Tweed, Hadley & McCloy LLP
Mitra Energy Inc.
Morgan Stanley
Morrissey Goodale
MUFG
Mustang Fuel Corp.
Nabors
NAC
National Oil Production Company LLC
National Oilwell Varco
Nautronix
Navigant
51
62
59
56
8
59
16
62
16
61
62
61
16
62
51
60
56
60
61
55
NETHERLAND, SEWELL
& ASSOCIATES INC.
BC
Noble
51
Noble Corp. plc
60
Noble Energy
20
Noble Midstream Partners LP
15
Northern Indiana Public Service Company 62
NuDevco Midstream Partners LLC
59
Nueva Era Pipeline LLC
16
NYMEX
3
NYSE
56
Oasis Petroleum
52
Observer Research Foundation
64
Occidental
52
Oil India Limited
64
Oilfield Helping Hands
62
OKOGA
62
OMV
53
ONGC
64
OPEC
3,18,28,34
OpenLink
62
Opportune LLP
59
OTCQX
56
Pacific Exploration & Production Corp.
61
Paragon Offshore plc
60
PDC Energy
20
Perella Weinberg Partners
50
Permian Express Partners LLC
14
Petrofac Ltd.
62
Petronas
12
PetroQuest Energy Inc.
56
Phase 4 Energy Partners Inc.
15
Pierce, Fenner & Smith Inc.
16
Pioneer
51
Plains All American Pipeline LP
16,51
Platts
32
PLS Inc.
52
Ponderosa Energy
55
PWC
PwC
QStar LLC
Questar Pipeline LLC
RBN Energy
Real Core Energy
Repsol
Resource Energy Can-Am LLC
Richards, Layton & Finger
34
52
16,53
30
44
41
54
16,55
COMPANY
PAGE
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priced at $6.61 per MMBtu on GCV basis for the period from
April 1, 2016 to Sept. 30, 2016.
However, since that decision was made, global oil and gas
prices have fallen significantly, impacting the attractiveness of
the upstream sector to potential investors. The domestic gas
price fell to $2.5 per MMBtu, and the price ceiling for ultradeepwater, deepwater, and high-pressure/ high-temperature
gas dropped to $5.3 per MMBtu. This represents a decline of
18% and 19.8%, respectively, during a six-month span.
Domestic gas prices have now fallen below the average cost
of production for many companies, say ONGC and Oil India
Limited, which have an average cost of production of $3.59 per
MMBtu and $3.06 per MMBtu, respectively. These producers
and others have been hit hard by the price decline, which will
adversely impact new gas development projects.
However, lower gas prices are having a positive impact on
the power, fertilizer, and city gas distribution sectors. The price
decline has improved the cost competitiveness of domestic
gas-based power projects against coal-based power generation.
Similarly, the government subsidy to the fertilizer sector for
FY2017 has been reduced due to lower fuel costs. Prices for
compressed natural gas and piped natural gas are now more
attractive compared to petrol/diesel fuel and LPG, which will
create new demand in both segments.
The pricing of natural gas in India, therefore will play a crucial
role in supporting Indias natural gas ambitions. Since the pricing environment of natural gas in the country fulfills dual, albeit
contrary, objectives of incentivizing the domestic natural gas
production and making natural gas economics attractive for
consumers, these should be balanced well.
As a net importer of natural gas, India thinks the price of
domestic natural gas should not be a deterrent for gas producers. It should be such that it allows natural gas producers the
incentives to tap into the huge gas resource potential within
the country. In this regard, similar pricing and marketing freedom, if allowed for onshore discoveries as well, may create a
sustainable pricing environment. However, for this to happen,
it is crucial to maintain the competitiveness of natural gas vis-vis other fuels.
ABOUT THE AUTHORS
DECEMBER 2016
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