Anadarko Petroleum Corp. is doing “a lot” of experimentation in the U.S. onshore to determine how best to drill unconventional wells to ensure optimized estimated ultimate recoveries (EUR). What the management knows for sure is that the bigger the hydraulic fractures (fracks) the more a well can recover, said CEO Al Walker.
Walker and his management team discussed the company’s quarter and year-end results with financial analysts last week. In addition to revving up in the Gulf of Mexico operations, Anadarko is building its onshore reserves all over the United States, in Colorado’s Wattenberg field, as well as the Eagle Ford and wet gassy areas of the Haynesville shales. Initial drilling is under way in the Utica Shale to pare with ongoing completions in the Marcellus Shale. The slow-and-steady process of experimenting has lowered well costs and is building reserves.
“It’s really around optimization,” Walker said. “I think the industry will tell you that the bigger the fracks, the longer the fracks, the more sand you put in there, the more EUR. That makes sense, but it comes at a cost, because we are working the optimization angles and there’s all kinds of parameters we are dealing with, frack lengths, frack types, cluster density, you name it. We are trying to optimize around it and doing all the work in each one of these places to get the up to momentum.”
Shale reserves bookings over the past year are up, but “they are still a very small percentage overall” of the portfolio,” said CFO Robert Gwin. “There’s a pipeline of bookings there that we think is pretty substantial and even well beyond 2014.”
It’s stop-and-start, depending on where the drill bit goes and if there’s infrastructure behind it. Anadarko’s quarterly peak volumes from the Eagle Ford operations fell year/year to 39,000 b/d from 54,000 b/d.
“The Eagle Ford, like many of these other large resource plays, continually have constraints on them with regard to the new plants being tied in, pipelines going down for expansion, those type of things,” Gwin said. “So what we find is, and it is particularly true in the Eagle Ford, is that our ability to sell our total flow volumes are all often times restricted. Every now and then, the stars and moons line up that we can sell our full volume and that’s when you see the peaks.” However, “all of that congestion that we see in the Eagle Ford is slowly getting worked out. The growing pains, if you will, are slowly dissipating.”
Anadarko faces similar constraints in the Marcellus Shale, but they are unlike those in South Texas, said Senior Vice President Robert Daniels.
“The pace of completions [in the Marcellus] have been such that we were able to sell a good share of our volumes,” Daniels said. “We haven’t had the percent of downtime, if you will” as in the Eagle Ford. “There are a number of the drilled-but-not-completed wells that are still out there that we are slowly working up that inventory. So that gives you a little bit of pent-up opportunity, but it is not that idle capital in regards to having it behind the choke and you can’t sell it.”
In any case, oil and liquids are the primary target in every onshore basin because natural gas prices are expected to continue to low, he said. “Generally, our expectation is that our gas production will be relatively flat. Time to time, it will be up a little bit, primarily driven by the outstanding results we have seen in Marcellus…”
Anadarko plans to maintain four dry gas drilling rigs in the Marcellus this year, same as last year. “We are not taking it down and not taking it up,” said Walker. “I don’t think you should expect that industrywide, in this price environment, anyone is going to do a lot with dry gas, but the one dry gas basin, the Marcellus, which does have the economics.”
The Wattenberg remains at the top of Anadarko’s onshore prospect list. The unit produced more than 103,000 b/d for the quarter and liquids output jumped 17% year/year, said U.S. onshore exploration chief Chuck Meloy.
“Industry is doing quite a lot of spacing test as well as lateral length test,” Meloy said. “We are slowly, slowly pulling into around 12 wells per section. There will be sections that have 12 wells per section, probably defined about two-thirds Niobrara, third, Codell. We’ve really pushed the limits lateral length out to 9,000 feet and 10,000 feet. We do see better results with longer wells, the first few longer wells that drilled. With the longer laterals, you have more completions to do so there is a timing element involved, and so we are looking at the optimization of the economics on cost versus lateral length.”
The Wattenberg field’s output was up 22% in 4Q2012 from a year earlier at 45,000 boe/d. The horizontal well count grew to 172 in the final three months from 100 in 3Q2012; another rig was added, giving it a total of 11 rigs in the play. The boom in Wattenberg output has led Anadarko to transport some of its oil by rail, said Meloy. “The rationale is to get us broader exposure, not just to Cushing [OK], but even to other potentially waterborne markets.”
Looking at performance, the well results in the Wattenberg are “really starting to tighten up and we are getting better and better at getting these wells activated and online…The infrastructure is there, the EURs are starting to consolidate around 350,000 bbl at about 5,000- or 6,000-foot lateral lengths. It’s just turned into an outstanding investment opportunity for us. We’ve essentially done a well with a vertical program in the field and then gone strictly to horizontals. Everything we are doing right now is to find the constraining parameter and then work through it so that we can celebrate the value delivered.”
Anadarko has tackled and appeared to solve water issues in the Wattenberg. On a per-well basis the company is saving an incremental $250,000 per well because it tied in a water trunk like.
“We continue to learn,” said Walker. “We’ve reduced our spuds, rig release time about 38% year/year and our drilling costs are down about 15%, so we are…always fighting inflation, service cost sand trying to outpace those with efficiency. One of those is the water-on-demand process…where we can deliver water to our rigs to our completions through pipelines. We have a very low cost delivery.
“Before, we had to put a bunch of frack tanks on location, do a lot of trucking to get water to those completions…We have done away with that cost. We’ve also done away with that footprint, where there were many trucks on the road and now it’s a very environmentally friendly type of process…”
All of Anadarko’s activities “provide confidence in our ability to achieve our goal of 3 billion barrels of reserves by the end of 2013,” said Walker. “In 2012, we added reserves at competitive costs of $14.65/boe, excluding the impact of price revisions. Our proved developed reserves now comprise 74% of our year-end total, an improvement over the previous year’s 71%. Natural gas prices decreased by about 31% on average for the year, yet only about 2.5% of our reserves were impact, almost all of which returned at today’s strip prices.”
Anadarko delivered record sales volumes of 268 million boe, at the high end of its guidance, and it replaced 162% of its reserves. Proved reserves at the end of 2012 were estimated at 2.56 billion boe, up from 2.54 billion boe in 2011. Net profits in 4Q2012 totaled $203 million (40 cents/share), versus a loss of $358 million (minus 72 cents) in 4Q2011. Excluding one-time charges, Anadarko earned 91 cents/share; Wall Street had pegged average per-share earnings of 72 cents.
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