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In the Shale Patch There Are Seasons

Landmen headed for the Eagle Ford Shale, you're too late. Engineers need to hurry. And beancounters, your day is coming. The Eagle Ford is the hottest thing in South Texas, but like the unconventional plays that came before, it too will have its seasons.

"The way you look at the play needs to change as the play matures because strategies that succeed in one part of the play will not succeed in other parts of the play," said PFC Energy's Raoul LeBlanc, senior director of the financial advisory practice. "...[F]or companies, understanding what they're good at, what they're going to be good at and when the time for that may have passed or not yet arrived is very important."

To illustrate what's to come in the Eagle Ford, LeBlanc turned to the more mature Fayetteville Shale in Arkansas during his presentation at Hart Energy Publishing's Developing Unconventional Gas: Eagle Ford conference last week in San Antonio, TX.

In the middle of the decade people were "drilling in a whole bunch of places" in the Fayetteville, he said, noting that relative to what was to come later, wells of this vintage were seldom "above the median." They were "almost all bad wells in terms of the life of the play." But that didn't matter, as the best was yet to come.

This earliest period is what LeBlanc described as the "prove its potential" phase in the development of an unconventional play. During this stage the play is largely a "science experiment" marked by geoscience, land acquisition and pilot well activity. "We would argue that you have to do the sort of things that would normally get you fired in an oil and gas company," LeBlanc said.

"Science experiment is a dreaded phase in the oil and gas industry, but in fact this is what people are actually doing."

While it may seem counterintuitive, during this period the odds of success increase when there are more companies active in the play, he said. Also during this period, oilfield service providers have much to offer their exploration and production (E&P) company clients as they possess science and technology relative to the play that "can be very valuable, particularly at this stage," and worth the price, LeBlanc said.

At this stage E&Ps need to focus on their cost for acreage, the quantity and distribution of their leasehold and the reservoir information they garner from each drilling dollar. "Every well you drill is really going toward information," LeBlanc said.

Next came the "optimize it" phase in the Fayetteville, the beginning of which is where the Eagle Ford is now.

"It's a fairly chaotic phase where you have a multiplicity of players and a multiplicity of service providers and investors and lots of people crowding in and starting to lay the foundation for a full-scale play," he said. "In terms of what succeeds, it's sort of right-brained engineering. The goal of this phase is to find the recipe that will get these wells to maximize production over time."

Those that succeed here are companies that can digest "hundreds of thousands or millions of data points that are coming at them in real time and turn those into knowledge that they can apply next week on the well that they're going to drill," LeBlanc said.

During this period companies focus on trying everything, gaining scale and scope and ramping up drilling. An E&P often will call on multiple service companies to maximize access to creativity, LeBlanc said.

"This is also the phase where we start to see consolidation of companies," he said. The first wave is made up of players that are succeeding in understanding the play buying up "companies that either aren't getting the results that they need or don't have the capital and wherewithal to go to the next phase."

During this period in the Fayetteville, lateral lengths grew dramatically. While initial production per lateral foot became less impressive, well economics were improving. "Here's the phase where we're really trying to get to the recipe of what works and everybody knowing what that is," LeBlanc said.

In the Eagle Ford "people are now more into the production of the well than actually testing the reservoir, LeBlanc said. "Don't get me wrong. There's still a lot of that going on because this play is so large, but we would argue that you're essentially beyond the prove it phase and you're now here in the optimize it phase; you're early in this phase...Were still on that path to figuring out how long we can drill these laterals economically, what we ought to do, how we ought to complete them and what we're going to get from that."

The transition to the third phase -- "industrialize it" -- represents significant change and the emergence of the gas factory.

"We have very large programs and the focus really moves from a lot of the subsurface to the above-ground," LeBlanc said. "In terms of strategies, this is the place where you start to do cookie-cutter, and the risk here is actually that you start to tailor every well."

Midstream assets and capacities need to be aligned with production needs "so that this machine that is cranking out production can just keep going. In this phase a premium [oilfield] service provider really may not find that they'll get much traction because the small service companies have caught up and they're doing the exact same well as everybody else is doing so the E&P companies tend to go with the cheaper companies."

It is during this phase that the majors tend to buy in as their relatively lower cost of capital "enables them to invest the sums that are necessary and, frankly, get better returns, simply based on that metric," LeBlanc said. "You also get a lot of clustering at this point where people start to drill infield wells in the core areas."

Finally comes the "rethink it" phase when new ideas and/or technology are needed to rejuvenate a mature field where assets have likely changed hands. "You can try to develop it more intensively; you can work the base; you can expand outward; you can go deeper..." LeBlanc said. "Sometimes it involves brining in new technologies...A lot of it involves keeping the costs low...

"You have to maybe find another sweet spot or bring in a new idea to an old field."

What drives a play through these phases is a wide variety of things, some of which are not directly related to the play itself. Prices, company attitudes, compositions and skill sets are all factors, LeBlanc said. "The comparative advantage that a company has to have also is not going to be static, and so companies need to deal with that.

"Every company can stand up and show you the metrics that work for them. The question is what are the metrics that are important now in the play for success."

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