Domestic Unconventional Resources in 2014: Ten Issues to Watch

18 Feb 2014 Raoul LeBlanc

The domestic oil and gas supply machine is in a state of flux. The gas supply system is entering a third year of oversupply with hopes for improving conditions later in 2014. Prospects for gas will hinge on a number of key factors including developments in the Marcellus, production of associated gas, and pricing.

The oil supply apparatus finds itself standing at the threshold of and poised to step toward oversupply. A key question weighing on many minds concerns the impact from even greater success in bringing on new supplies; examples: an emerging play turns into the next big thing, new hydraulic fracturing techniques lead to another breakthrough, geosteering advances allow precise wellbore placement and increased production results, and so forth.

Here is a look at 10 issues that we believe will be critical in 2014:

1. Is Pennsylvania the New Rockies? 2. Marcellus DUC's: Is the cheap growth ending? 3. What happens if associated gas wanes? 4. How much does a cold winter really matter to gas prices? 5. Can anything change the steep trajectory of unconventional oil growth? 6. Does the Eagle Ford DUC (drilled but uncompleted wells) tailwind drive easy production growth? 7. Emerging liquids plays: Why aren't they developing faster? 8. Why are Bone Spring wells showing improvement and will it continue? 9. Are new hydraulic fracturing techniques really changing the game? Everywhere? 10. Who can thrive in a low price environment?

Domestic Unconventional Resources in 2014: Ten Issues to Watch

1. Is Pennsylvania the New Rockies? Finding outlets to accommodate Marcellus supply growth will be paramount in 2014 and beyond. Regional demand is not expected to keep up with projected growth in the Marcellus. Will the Marcellus face the same predicament of semi-stranded gas, reactive infrastructure build out, and low and volatile netbacks from which Rockies and Canadian producers have long suffered? 2. Marcellus DUC's: Is the cheap growth ending? While the rate of DUC [drilled uncompleted well] conversion in the Marcellus slowed in 1H2013, the surge in late 2013 growth that pipeline scrapes suggested may indicate that producers ramped up DUC conversion to fill new pipelines. We have estimated that the backlog of DUCs will be worked off during the first half of 2014. If this does occur, would fewer wells onstream each month reduce growth in the play materially? Will it force producers to raise the rig count?

3. What happens if associated gas wanes? Associated gas has been a secondary factor contributing to relatively strong domestic production in the past 24 months. Would a pullback in liquids pricing render those wells that have been carried by minimal crude content or NGL cuts uneconomic? Which areas would be most at risk (Oklahoma?) and how would this impact gas fundamentals?

4. How much does a cold winter really matter to gas prices for the rest of 2014? Historically, weather has been a key determinant of natural gas prices during the winter, and this winter has been quite cold thus far. If we end the season with substantially below-normal inventories, does this create a deficit that will support prices for the rest of 2014? Or will the market revert to its "new normal" view of prices in the $3.50 range?

5. Can anything change the steep trajectory of unconventional oil growth? In the mid-2000's North American natural gas industry learned how to de-risk and exploit unconventional gas on a grand scale. Production rocketed up and eventually overwhelmed local demand. With no access to the wider global gas market, the ensuing glut has persisted and prices remain near the lows of the past decade. The oil machine has also de-risked plays and has created strong growth. Will it share a similar fate or will the differences allow the oil renaissance to continue?

6. Does the Eagle Ford DUC tailwind drive easy production growth? Based on a review of IHS data, we estimate there are at least 1500 DUCs in the Eagle Ford. From an economic perspective, operators should be highly biased toward completing these wells. Consequently, will Eagle Ford DUCs have the capacity to drive easy production growth, even in a downturn? 7. Emerging liquids plays: Why aren't they developing faster? Outside the Eagle Ford and Bakken, no play contributes more than 7% of the overall wedge volumes? What is holding back the plays? Will the oil stool gain a "third leg" in 2014? Will the Permian finally register as important to production growth?

8. Why are Bone Spring wells showing improvement and will it continue? Operators have been able to achieve better results in the Bone Spring primarily through improved completion techniques and better bench selection. Will this become a premier play in 2014? 9. Are new hydraulic fracturing techniques really changing the game? Everywhere? While early results have shown some reasons for optimism, it is still far too early to declare success, especially on a grand scale. Important questions remain: How well does the technique travel from play to play and among operators? Does it work in the various gradations of acreage? What is the impact on longer-term declines and recovery factors? 10. Who can thrive in a low price environment? If oil prices come under fire and gas prices remain relatively low, the industry would see tougher times. Companies have a variety of weapons to defend themselves (hedging, high-grading, balance sheet strength, cost-cutting) but who might the eventual winners - and losers, be?

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