The Unconventional Revolution – We Are Just Beginning the Journey

Unconventional development is in its infancy: With approximately 1,400 rigs drilling over 25,000 wells in 14 U.S. unconventional plays this year alone, some might suggest that several plays (most notably the Bakken and Eagle Ford, each with approximately 200 rigs, and the Permian Basin, with more than 500 rigs drilling for stacked pays) are entering the “mature” phase of development activity and are essentially fully valued in the marketplace.

U.S. unconventional development is still in the early stages, with less than 10 percent of the ultimate total number of wells having been drilled in any major play. In addition, there is considerable additional value realization for current operators and new entrants from “manufacturing learning” around drilling (drilling days per well reduction), single-well productivity improvement (completions), and down-spacing/stacked pay development.

Quantifying learning and other value drivers is critical: The ability to quantify the uncertainty around future learning will separate successful operators and other value chain players from the pack and will drive future consolidation and merger and acquisition activity. The combination of drilling and completion learning will unlock value via sweet-spot expansion toward “fringe” acreage and creation/transference of knowledge between plays, players, and emerging plays. Incorporating learning into valuation and resource assessment significantly changes operator beliefs about the amount and timing of production from individual assets and plays, which goes directly to asset value and play value.

The industry’s current lack of incorporating the magnitude and uncertainty associated with learning has led to underestimation of production. This underestimation has led to delayed infrastructure investment, among other issues. In the Bakken/Three Forks, underestimation led to existing infrastructure being quickly overwhelmed early on. The result is the industry’s reliance on more expensive rail and trucking of crude, and the ongoing flaring of gas that can’t be brought to market. In the Marcellus, wells were shut in as productivity of wells overwhelmed the then-current transportation infrastructure—when infrastructure did catch up, we saw the unusual phenomenon of significant increase in gas production (with no new drilling), as previously drilled wells were completed and brought online. At the same time, the overall industry success in unconventionals has led to unprecedented investment opportunity in U.S. midstream, refining, and chemicals.

Consolidation is Beginning and Will Accelerate

All major basins go through operator consolidation over time, and the Bakken (37 operators/active players) and Eagle Ford (200 active operators/active players) are highly fragmented. The San Joaquin Valley had many operators in the early stages of development, but now has only two to three dominant players. Similar consolidation is expected to occur in the major unconventional plays over time—faster if a drop in liquids prices is observed. In fact, we believe consolidation has begun in the Bakken, where Whiting Petroleum recently purchased Kodiak Oil and Gas, creating the largest Bakken Three Forks producer, while providing for “meaningful production and operational synergies” and “materially enhanced scale to support growth.”

The ability to understand where and how value is created in these plays will be key to successful consolidation—with learning-driven cost and productivity improvement leading the way.

How Learning Occurs, and How to Value It

The “cumulative” impact of multiple operators and service companies working to improve costs and performance drives industry investment and returns. In these plays, where there are many operators and many service providers actively focused on reducing costs while improving productivity, all technologies and ideas are quickly disseminated across the play and to other U.S. and international plays. Looking at historical drilling and production data, every unconventional play has demonstrated the cumulative impact of this rapid dissemination of learning. Further, the results for individual operators are widely dispersed across these dimensions. Those companies (construction, frac fluid, digital oil field services, cement, drilling mud, etc.) that seek to enter the unconventional value chain must provide products and services focused on supporting these learning value drivers if they expect to get the attention of operators and oil field service providers. There are three critical learning factors driving value:

  1. Bringing production forward through drilling efficiency: Drilling cost/time improvements will be led by rig upgrades, directional downhole tools, pad drilling, and a host of incremental improvements that reduce costs and increase drilling efficiency. In the past five years, the Bakken has seen a 45 percent decrease in days to drill a well, and this trend will continue. The net result has been faster-than-expected production growth as operators drilled more wells than forecasted in initial field development plans.
  1. Performance improvement: Well productivity is a huge value driver. Increasing the size and permeability of the conceptual cylinder of fractured rock that surrounds the well bore ultimately increases well productivity. A multitude of methods are currently employed to increase well performance, including optimization of well spacing, the number and length of laterals, number of fracs per lateral, perforation techniques, amount and size/type of proppant (sand, resin-coated sand, ceramic, resin-coated ceramic), amount and type of frac fluid, and timing of fracs (zipper frac, simulfrac, etc.). It is important to recognize and value the fact that these techniques will continually evolve and successful models will ultimately lead to productivity improvement.
  1. Stacked pay identification and development: The king of the stacked pay is the thick and prolific horizons of the Permian Basin in West Texas. The Bakken also has stacked plays with multiple Three Forks Benches. Initially, the play focused on the Bakken alone, but it quickly moved to the Three Forks. Further investigation has identified multiple additional Three Forks benches, which are being tested by multiple operators. In the Eagle Ford, we have the potential for the Pearsall Shale and the northeast extension of the play, the Eaglebine.


Creating sweet spots through application of technology: At a field level, average well rates overall are expected to remain flat from the combined effect of continued productivity improvement in known sweet spots and drilling in fringe areas where improved completion techniques are being applied to formerly uneconomic assets. These same techniques will be used to develop stacked pay zones (e.g., the Three Forks benches, Pearsall Shale) and will likely create economically viable drilling opportunities out of currently marginal and emerging plays in the future. There are decades of drilling (and learning) ahead, and the value of cumulative industry learning in the unconventional arena should not be underestimated.

Learning creates value: Explicit consideration of learning leads to higher quality and more realistic asset valuation, field development planning, resource assessment, and production forecasting.   Current sweet spots are likely not fully valued, as the value of additional productivity and drilling learning, down-spacing, and stacked pay is not adequately quantified. Sweet spot expansion, through application of productivity improvement and drilling efficiency learning to fringe acreage, is undervalued, creating investment opportunities for latecomers in active plays. Successful players systematically identify and quantify all sources of value and continually drive learning in each phase of unconventional operations.