Expect to see more development in the next few years in North America's tight gas, deepwater and heavy oil plays, the Upstream Americas chief for Royal Dutch Shell plc said Wednesday.
Speaking to financial analysts during a two-day conference in Canada, Marvin Odum said the upstream arm is going to be one of the main growth engines in Shell in the next several years.
"What does that mean? Oil and gas production was about 700,000 boe/d in 2009, or just over 20% of Shell's total. Today we're working on an exciting suite of new projects. Some of these are ramping up today...some are under construction." Overall, he said, there will be "more tight gas, more deepwater, more heavy oil."
Shell's upstream plans are "going to drive a much more significant financial contribution from the Americas than you've seen in the past...that's financial growth from new fields and sustaining and improving our financial performance from today's production base," he said.
"We've come a long way with tight gas in the last few years," said Odum. "We got comfortable with the technology and cost drivers in plays like Pinedale [Anticline] in the Rockies, and in South Texas, and then made a strategic decision in 2007 to push harder into this play.
"The outcome was a rapid move into new acreage positions, through a series of bolt-on acquisitions, joint ventures and acreage purchases. Today we have around 2.3 million acres of core, highly contiguous positions, some 12,000 drilling locations and around 40 Tcf of resources potential. If you add in the acquisition spend, and the exploration and appraisal cost, then this portfolio has cost some $4/Mcf, or some less than $3/boe."
Odum said it would "take time to crystallize out this potential into reserves and production," but "we have built the foundations of a multi-decade program here."
Tight gas is worth developing, even at a low gas price, he said.
"A full-scale tight gas development takes hundreds of wells, and the key to a profitable project is to use the learning curves from these large-scale drilling programs to drive down costs at the breakeven point. Pinedale is a great example...Shell's average well drilling days there dropped from over 60 to just over 25 days since 2002, a 60% reduction."
Overall, said Odum, Shell is looking at net present value (NPV)-based "breakeven points as low as $3/Mcf on a go forward basis in our portfolio today and cash operating costs of less than $2. The returns outlook is attractive..." Shell's internal rate of return for tight gas is more than 30% at $6 gas prices "or lower to mid teens on a lifecycle basis."
The tight gas plays offer "good financial and operating flexibility," which allow Shell to "flex the drilling program around lease expiry and retention...by the capital requirements for Shell overall, and by the near-term view of natural gas prices.
"In practice, we are budgeting on a six to 12 months basis and currently expect to spend around $2.6 billion in 2010 excluding acquisitions," Odum said of the tight gas plays. "This spending flexibility leads to quite a range of potential outcomes for production and cash generation."
As an example, he said, "if you think about $4 billion per year of investment, then this leads to around 3 Bcf/d of production and $3.5 billion of cash flow at $4 gas prices, rising to over $5 billion of cash flow at $6 gas."
Shell completed a major restructuring in 2009, which reduced management and staff, and realigned its business units. About 400 positions within the Upstream Americas business were eliminated. The diverse Americas units were combined into three large entities: Exploration & Production, Gas & Power and Oil Sands. In turn those components were organized into four new business units: Onshore Gas, Deepwater, Heavy Oil and Exploration.
Besides tight gas, Shell's "major" growth areas in North America recently have been in Alaska, the Gulf of Mexico (GOM) and "selective bets" in South America. Despite some pushback, Chukchi Sea exploration remains on Shell's activity board.
"The USGS [U.S. Geological Survey] estimates the global Arctic holds 13% of the world's total undiscovered oil and about 30% of the undiscovered natural gas," said Odum. "We have invested $2.2 billion in new acreage in Alaska since 2005. Shell has a long history in Alaska, and we drilled in the Beaufort [sea] and Chukchi in the 1980s and early '90s.
"Most of those wells found hydrocarbons, but the scale wasn't there, more technology was needed, and the company had different priorities at that time. Today, with the advent of improved seismic and Arctic development technology, we are back in Alaska with an attractive inventory of large prospects to drill."
The federal drilling moratorium extends to Alaska's offshore and "we don't know when we will be able to drill there," Odum acknowledged. "But this is an exciting area for the future, and we are actively working the environmental and political issues to be able to get moving with our drilling program in Alaska."
Shell also eyed the GOM and in the early 2000s it started "investing heavily in technology to sift bid prospects for the coming rounds of potentially rich lease sales. And this has led to a rather proactive acreage strategy.
"In six sales since 2007 Shell has acquired more than 130 carefully targeted deepwater lease blocks. This is a success story...and we have discovered over 500 million boe of resources with the drillbit in the Gulf of Mexico for Shell in 2009 and 2010."
Despite the GOM drilling moratorium, Shell is operating "where we have kept our equipment warm at reduced dayrates," he said. "This ensures a safe and efficient restart of operations. We are also using the standby period to upgrade and recertify rigs for safe and compliant deployment at the conclusion of the moratorium."
The moratorium's "production impact this year is small...but there could be a knock-on effect larger than 2010 next year....So we have a pretty robust outlook in the deepwater Gulf. Yes, there is a moratorium, and some uncertain times around new regulations and overall development pace. However, we do expect a resumption of industry investment in the Gulf once the lessons from Macondo [well disaster] have been learned."
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