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Unconventional Oil & GasDemystifying Fracking and Understanding Global Opportunities
September 2014
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Information contained in this presentation is for information purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by Van Eck Global or its affiliates. This material does not constitute an offer to sell or solicitation to buy any security, including shares of any fund. An offer or solicitation will be made only through the fund’s official offering document and will be subject to the termsand conditions contained therein.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any timeand from time to time and portfolio managers of other investment strategies may take an opposite opinion than those stated herein.Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may notcontinue.
The information herein reflects prevailing market conditions and our judgments as of the date of this document, which are subject tochange. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Opinions and estimates may be changed without notice and involve a number of assumptions which may not prove valid. There is no guarantee that any forecasts or opinions in this material will be realized. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This information should not be construed as investment advice. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by Van Eck Associates Corporation or its affiliates. © 2014, Van Eck Global
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global.
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Demystifying Fracking & Understanding Global Opportunities
Unconventional oil and gas extraction from shale via horizontal drilling and fracturing (often referred to as “fracking”), though in existence for some time in some form or another, has only recently been explored in depth in the U.S. and has experienced significant advancements via the evolution of drilling technology
While unconventional oil has been transformational for the U.S., we believe we are still primarily in the “discovery and delineation” stage of unconventional oil resources
As the U.S. enters the “exploitation phase”, companies may continue to improve and capitalize upon drilling efficiencies, adding value and potentially contributing, perhaps significantly and over longer periods, to global production and reserves
Unconventional oil reserves are not unique to the U.S.; many other countries have substantial potential
When taken to its logical conclusion, unconventional oil and gas production has significant implications with respect to the global energy supply, though challenges still remain
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Stepping Back – How is Oil & Gas Formed?
Over millions of years, heat and pressure formed by the layering of sediment and rock have turned the remains of ancient marine organisms into oil and gas which are now “trapped” in these layers miles below the earth’s surface
Source: www.need-media.smugmug.com; Data as of September 2014.
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Conventional vs. Unconventional Oil: A Primer
Source: Pioneer Natural Resources; Data as of September 2014.
CONVENTIONAL UNCONVENTIONAL
High permeability
Fracking: minimal
Principal evaluations:
Trap Seal Source Reservoir Migration Timing
Primary risk: geologic
Access: vertical wells
Ultra tight rock
Fracking: large, hydraulic
Principal evaluations:
Kerogen content Maturity Clay content Pressure Bulk volume
Hydrocarbon
Primary risk: economic
Access: horizontal wells
Seal/Trap
Conventional Gas
Conventional Oil
Permeable rock formations(oil and gas can migrate through)
Source rock where oil and gas forms
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Three Factors that Sparked the U.S. Shale Revolution
Source: EnCana, Pioneer Natural Resources; Data as of September 2014.
I. Horizontal drilling technology (began 1930’s):
allowed access to significantly greater volume of reservoir rock
II. Horizontal hydraulic fracture stimulation technology (began 1950s):
created porosity and permeability – created “channels” that allowed oil and gas to flow
III. Historically strong commodity prices
Horizontal Well With Multi-Stage Fracturing
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Natural Gas19%
Renewables9%
Nuclear19%
Petroleum & Other Liquids
3%
Coal50%
Source: Pioneer Natural Resources; Data as of September 2014.
Natural Gas27%
Renewables13%
Nuclear19%Petroleum & Other
Liquids1%
Coal40% Natural Gas
35%
Renewables16%
Nuclear16%
Petroleum & Other Liquids
1%
Coal32%
Previous Power Generation Mix2005
Current Power Generation Mix2013
Projected Power Generation Mix2040
2005 Capacity = 4.1 Trillion Kilowatthours
2013 Capacity = 4.1 Trillion Kilowatthours
2040 Capacity = 5.2 Trillion Kilowatthours
Natural gas has encouraged coal-to-gas switching among electricity producers
How the U.S. Shale Revolution Has Shaped U.S. Energy Production
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How the U.S. Shale Revolution Has Shaped Global Supply
Source: U.S. Energy Information Administration (EIA); Data as of July 31, 2014.
Oil Supply Growth During 2009 – 2014 (with Brent Crude Oil at $105 / bbl)
-1
-0.5
0
0.5
1
1.5
MM
Bbl/d
US FSU NON-OPEC ex-US & FSU
Year-over-Year Growth in SupplyU.S., Former Soviet Union (FSU), Non-OPEC ex-U.S. & FSU
Mill
ion
Barr
els
Per D
ay (M
Mbb
l/d)
Mill
ion
Barr
els
Per D
ay (M
Mbb
l/d)
80
85
90
95
2009 NorthAmerica
Other Non-Opec
Saudi Arabia Other Opec 2014
85.2
4.9
1.41.4
92.8
-0.1
U.S. and Canada have been the only recent source of non-OPEC (Organization of the Petroleum Exporting Countries) supply growth
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How Can the Value of Unconventional Resources be Increased?
Acquire more land
More stratigraphic layers
Tighter well spacing
Longer, more accurate laterals
More frac stages
Bigger frac stages
Faster drilling
Reduce drilling costs
Optimize production
Stack laterals
Integrate frac distribution
Access More Rock Improve Well Economics
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Case Study: Whiting Petroleum – More and Bigger Frac Stages
Source: Whiting Petroleum; Data as of June 30, 2014.
Annulus (Gaps) Stages Frac Ports / StagePotential
Entry Points
Free fluidbetween packers
30 1 30
Annulus (Gaps) StagesPerforation
Clusters / StagePotential
Entry Points
Cemented 40 3 120
Older Style Completion
New Style Completion
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Case Study: Concho – Faster Drilling, Longer Laterals and More Frac Stages
Source: Concho Resources; Data as of June 30, 2014.
3026
23
2012 2013 1H14
4,266
4,359
4,657
2012 2013 1H14
2012 2013 1H14
175
186
206
2012 2013 1H14
Average Drilling Days – 23% Decrease Average Lateral Length (Feet) – 9% Increase
Average Stages Per Well – 27% Increase (note: figures intentionally hidden)
Average 30-Day Initial Production (Boepd* per 1,000 Wells) – 18% Increase
*Boepd = Barrels of Oil Equivalent per Day
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0
500
1000
1500
2000
2500
3000
0 6 12 18 24 30 36 42 48
Barr
els
of O
il Eq
uiva
lent
/ Da
y
MonthsOld Completion - 5,000 ft. lateral; 12 stages (12-well average)
New Completion - 5,000 ft. lateral; 20 stages (4-well average)
Long Lateral - 10,000 ft.; 43 stages (single well - Gallant Fox)
Case Study: Cimarex – Longer Laterals and More Frac Stages
Well Cost Estimates – Culberson County Wolfcamp D Wells
Source: Cimarex; Data as of June 30, 2014.
Old New Long
Well Cost ($MM) $8.0 $8.7 $13.5
Before Tax Internal Rate of Return (IRR) 30% 90% 161%
Net Present Value (NPV) with 10% Discount ($MM) $4.0 $12.2 $31.6
*Assumptions: Oil = $90 / barrel ; Gas = $4 / thousand of cubic feet; Natural Gas Liquid = $30 / barrel (full recovery)
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Game Hasn’t Even Started Yet Globally
The potential U.S. unconventional resource opportunity remains vast; yet represents a fraction of global unconventional gas reserves and overall global oil production
Countries with Major Unconventional Gas Resources(# of Technically Recoverable Resources) Global Oil Production
Source: U.S. Energy Information Administration (EIA), Bloomberg; Data as of July 31, 2014.
Mill
ion
Barr
els
Per D
ay (M
Mbb
l/d)
(Trillion cubic feet)
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Some Issues to Consider: Capital Intensity (Production Profiles)
Production Profile – Constant Well Quality
Source: Pickering Energy Partners; Data as of July 31, 2014.
Production Profile by Year – Constant Well Quality
High initial rates deliver a growing production profile
Production growth typically moderates but this happens, generally, after many years
Gas
Prod
uctio
n, B
illio
ns o
f Cub
ic F
eet P
er D
ay (b
cf/d
)
Gas
Prod
uctio
n, M
illio
n of
Cub
ic F
eet p
er D
ay (M
mcf
/d)
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Some (Additional) Issues to Consider: Environmental Impacts
Source: The American Oil & Gas Reporter; Data as of September 2014.
Sample Map of Frac Treatments – Barnett Shale
Oil W
ell,
Frac
Leng
th, a
nd A
quife
r Dep
th (F
eet)
Groundwater contamination risk should be less of a concern as tests on well depth, frac length and corresponding distance from water aquifers generally exhibit large separations
Distance between the deepest aquifer and longest frac is approx. 4,000 ft.
Deepest Aquifer Depth
Frac Length – TopOil Well – Top Oil Well – Midpoint Oil Well – Bottom Frac Length – Bottom