The era of low prices and gas shale play abundance has forced exploration and production (E&P) companies to focus more intently on cost control and has brought independents and majors together as they develop North America's natural gas factory, an analysis by Deloitte has found.

"Leading producers have adopted the view that unconventional production is like a manufacturing process where lean principles are driving reduced cycle times and direct costs on a per-well basis, resulting in increased productivity and returns on capital," Deloitte said.

The first step taken by many independent producers has been portfolio rationalization and the divestment of noncore assets. "A prime example is Devon Energy's strategic repositioning to focus on North American assets," Deloitte said in a new white paper. "In late 2009 Devon announced its plan to divest all noncore assets, allowing the company to continue to meet long-term debt obligations despite declining cash flows" (see NGI, June 14).

Others that have divested assets and reallocated capital have been Petrohawk Energy Corp., Talisman Energy Inc. and EOG Resources Inc., Deloitte noted.

"The predicted breakeven price for development of the major shale plays ranges from $3.38/MMBtu in the Eagle Ford to $10.26/MMBtu in the Western Extension of the Barnett [Shale], with the North American average at $6.86/MMBtu [according to Credit Suisse and others], immediately making apparent that price alone cannot drive sustained profitability for even the most productive shale asset," Deloitte said.

The current effort among E&P companies to beat down costs is not like what was seen in the past, the consultancy said. Rather than generic cost-cutting, companies are harnessing technology in the areas of horizontal drilling and hydraulic fracturing, as well as multi-well pad drilling to bring down costs.

Increasingly, companies are focused on strategic relationships that can lower costs. While producers compete for limited crew and equipment resources, they have learned that long-term relationships can improve costs and margins. "Independent operators have traditionally had long-term relationships, but as they mature they are driving more formalized strategic programs to exploit mutual benefits with suppliers and continue driving operational excellence and competitive advantages in key asset plays," Deloitte said.

While unconventional plays in the Lower 48 used to be the near-exclusive domain of independent E&P companies, the majors have come back to the table in a big way, Deloitte noted. In a joint venture, the independent can benefit from a major's deep pockets, and the major acquires the independent's expertise learned from years on the ground.

"In 2009 European majors invested nearly $5.6 billion in U.S. shale assets, and North American assets represented nearly 50% of global M&A [mergers and acquisitions] activity in the upstream sector, fueled by unconventional resources and a continued low-price climate, which provided an opportunity for better deals," Deloitte said.

Outright acquisition of independents by majors is another strategy that has taken root. Deloitte noted ExxonMobil Corp.'s acquisition of XTO Energy Inc. (see NGI, June 28) and Royal Dutch Shell plc's May agreement to acquire East Resources Inc. (see NGI, May 31).

Deloitte cited Energy Information Administration data that projects that unconventional gas production from shales and coalbed methane is projected to double from 17% of total U.S. production in 2008 to 34% in 2030.

"A new breed of E&P company focused on core competencies and unconventional assets with a low-cost, lean structure and a new way of dealing with strategic suppliers is emerging as the dominant player in the low-price gas market," Deloitte said.

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