American Oil and Gas Reporter - January 2015 - 58

Outlook 2015
put more wells on each pad, we will use that collaboration and
technology integration to pull all the information into one central database to figure out how to make the entire operation more
efficient, productive and profitable.
In a broader sense, there needs to be more collaboration among
operators to develop the natural resource effectively. It only makes
sense for operators with assets in close proximity to work together to solve common challenges. You also have to be able to share
information. We share information with other operators, and that
has been very beneficial. Once acreage positons in a play are defined, the operators should seek to work together to collectively figure out the best ways to drill, complete and produce wells
to optimize that resource base. That alone would go a long way
toward helping improve recovery factors.

Market Intelligence

Kevin Book, ClearView Energy Partners LLC

Much has been written about OPEC's late-November
decision not to lower production quotas. How do you
interpret the motivations behind that decision? What does
OPEC's decision imply about its longer-term objectives? What
are your expectations for the organization's strategy in 2015?

BOOK: Our firm sees two primary goals in OPEC's decision.
First, OPEC as a whole may be seeking to determine whether North
American production truly functions as "synthetic" spare capacity that will balance the market. Put another way, OPEC may be
gathering intelligence rather than prosecuting an all-out price war.
Second, we would hold that OPEC's Gulf Arab producers
(Kuwait, Qatar, Saudi Arabia and the United Arab Emirates) may
be seeking to persuade their higher break-even-price peers (i.e.,
Iran, Nigeria, Venezuela, etc.) to join them in any potential production cut. If we are right about both surmises-and if, as we suspect, a visible North American supply-side response shows up
soon-we would not rule out an "extraordinary" OPEC meeting
in the late first quarter or early second quarter and a production
cut. If we are wrong, a price war could last 18 months (or longer).

North American tight oil plays often are cited as being "high-cost" assets, but analysis by Deutsche Bank
indicates the "break-even" Brent prices needed for OPEC member nations range from $77 for Qatar to $104 for Saudi Arabia
and $184 a barrel for Libya. How do tight oil plays such as the
Bakken, Eagle Ford and Permian stack up in terms of break-even
prices, and what conclusions can be drawn from such an economic comparison? How long can OPEC countries tolerate prices
well below those levels?
BOOK: I might draw a distinction between a (mathematical)
break-even price that theoretically balances a budget and a (po-

58 THE AMERICAN OIL & GAS REPORTER

litical) breaking point that precipitates the fall of a regime. Budgets change when they must. Within OPEC, the Gulf state producers can fall back on stabilization funds and foreign exchange reserves. Most of the time, there is a big gray area between "in the
black" and "out of power."
Even if one takes break-even prices at face value, it may be
a mistake to compare a sovereign's existential needs with the financial management decisions made by private companies. Libya
offers a great example. Producer nations tend to produce no matter which sovereign controls the fields, but Libya needs money
so badly that production has resumed despite an unresolved contest for sovereignty.
By contrast, analysts can create spreadsheet models that project 10-15 percent internal rates of return for high-performing tight
oil projects at today's prices, but operators are laying down rigs
and cutting budgets already. To the last point, it may be too soon
to talk about any kind of OPEC dissolution. What better option
awaits the high break-even-cost producers? Allying with Russia?
Fiscal strictures facing Moscow make a return of "R+OPEC" look
pretty unlikely.

While oil remains a volatile commodity business,
historical trends indicate that what goes down must
cycle back up sooner or later. History also shows that a dramatic and rapid price movement in one direction inevitably tends
to be followed by a dramatic and rapid price movement in the
opposite direction. How much of an oil production response
to lower prices do you anticipate in North America? How soon
do you see U.S. exploration, drilling and production activity working through the downturn? What kinds of opportunities are on
the near-term horizon for independents with good balance
sheets and assets?

BOOK: Our models imply about six months of "braking distance" between a global crude price collapse and a U.S. drilling
slowdown. Depending on how one counts, December was
month four or five. This means, in effect, we are there.
Extrapolating trailing, 12-month average monthly production
growth through October in the four U.S. unconventional regions
with the greatest oil production (Bakken, Eagle Ford, Niobrara and
Permian) implies net calendar year 2015 growth of a little more
than 1 million barrels a day. By contrast, using a calendar year 2015
average Brent price of $75 a barrel, historical relationships between
price and production imply that the four-region growth could be
a little less than 600,000 bbl/d. At an average price of $65 a barrel, four-region 2015 growth falls below 500,000 bbl/d.
That kind of change could close the gap that both the International Energy Agency and OPEC project between supply growth
and demand growth in calendar year 2015, which would be bullish for prices-particularly if OPEC coheres around a production
cut.
For well-capitalized operators, the trough could offer an opportunity to acquire acreage as other players rationalize their capital expenditures toward their highest-performing real estate, but
it may make sense to take a hard look at near-term global demand
before rushing into acquisitions.

American Oil and Gas Reporter - January 2015

Table of Contents for the Digital Edition of American Oil and Gas Reporter - January 2015