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THE EXECUTIVE PUBLICATION FOR THE OIL AND GAS INDUSTRY

DECEMBER 2016

WPX IMPLEMENTS
3-BASIN STRATEGY

SPECIAL FOCUS:

2017 OUTLOOK
TRUMP AND ENERGY
CAPITAL COST REVIEW
TPH & CO. MERGER

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CONTENTS
V13/N O . 12 | DECE MBER 2016

THE EXECUTIVE PUBLICATION


FOR THE OIL AND GAS INDUSTRY

FEATURES
18

SHARE ISSUANCES IN VOGUE IN 2016


US companies issuing shares reaches 3-year
high in 2Q

18

POST-ELECTION ANALYSIS
Incoming President favors enhanced E&P
as tenet of energy, economic, and national
security policy

20

SHALE UPDATE
North American shale wins 2016

34

24

COVER STORY
WPX ENERGY
OGFJ recently visited with Rick Muncrief,
president and CEO of WPX Energy, to learn
how he was able to reposition the company
to survive the worst industry downturn
since at least the 1980s. During the past two
years, Muncrief has built WPX into one of
the Top 20 US producers in terms of total
assets and market capitalization.

42

30

STILL THEY RIDE


NE gas producers gear up
for winter
ON THE COVER
Rick Muncrief,
president and CEO
of WPX Energy

34

OILFIELD SERVICES CONSOLIDATION


Navigating the rough waters of sector
transformation

Photo by Evan Taylor


Photography

40

UPSTREAM CAPITAL COST REVIEW


A fresh approach to engineering, project
delivery could have long-lasting cost
implications

42

HARD TIMES FOR REFINERS


Decade ahead could prove challenging,
separating the best from the rest

44

OPERATING PROFITABLY WITH $50 OIL


A hybrid approach paves the way
to financial savvy

48

SEC EXTRACTION RULES


Rule 13Q-1 concerns payments to US and
foreign governments

50

TPH 2025 BY 2017


Need for growth capital spurs merger
of Tudor, Pickering, Holt & Co. with Perella
Weinberg Partners

DEPARTMENTS

3
4
8
10
14
52
54
59
64

EDITORS COMMENT
CAPITAL PERSPECTIVES
SECOND THOUGHTS
UPSTREAM NEWS
MIDSTREAM NEWS
DEAL MONITOR
INDUSTRY BRIEFS
ENERGY PLAYERS
THE FINAL WORD

Oil & Gas Financial Journal (ISSN 1555-4082). Oil & Gas Financial Journal is published 12 times per year, monthly, by PennWell Corporation, 1421 S. Sheridan, Tulsa, OK 74112.
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DECEMBER 2016

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OGFJ
.com

Vice President and Group Publishing Director Paul Westervelt


pwestervelt@pennwell.com
Publisher Jim Klingele
jimk@pennwell.com
Associate Publisher Mitch Duffy
713.963.6286 mitchd@pennwell.com
Chief Editor Don Stowers
dons@pennwell.com
Editor Mikaila Adams
mikaila@pennwell.com
Contributing Editors
Anthony Andora , Laura Bell, David Michael Cohen, Paula Dittrick, Brian Lidsky,
Per Magnus Nysveen, Nick Snow, Imre Szilgyi, Leslie Wei, John White

FEATURED CONTENT

Get up-to-date news and featured content on OGFJ.com


daily. Mergers and acquisitions (M&A) could become a greater
feature of the oilfield services landscape in the next 18 months
as businesses move out of survival mode and look to the future,
according to KPMG. Read the findings from the latest analysis,
and much more, every day, on OGFJ.com.

WEBCASTS
Did you miss our November webcast? Saudi Aramco presented
Data Lifecycle for Reservoir Simulation in Saudi Arabia.
Reservoir simulation data has been growing exponentially. In
2003, the reservoir simulation storage capacity was about 10
terabytes (TB), reaching 1000 TB in 2013, with a clear trend of
doubling every year. The utilization was always 95%, produced
and consumed by about 50 petroleum engineers, so users never
had enough space to finish their studies. Advanced techniques
that require more precision, new software, and cheaper storage
are provoking this growth. Listen to this, and other archived
webcasts, on OGFJ.com/webcasts today.

OGFJ APP UPDATE!


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& Gas Financial Journal mobile app for iPhone,
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OGFJs newest iOS update complete with a new
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the app allows users to select specific topics,
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As always, save favorite content, and
share information with just a touch. Visit
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OGFJ app today!

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Editorial Advisory Board


E. Russell Rusty Braziel RBN Energy LLC
Michael A. Cinelli Locke Lord LLP
Mickey Coats BOK Financial
Adrian Goodisman Moelis & Company
Bradley Holmes Graves & Co.
Maynard Holt Tudor, Pickering, Holt & Co.
Carole Minor Encore Communications
Jaryl Strong BHP Billiton
John M. White Roth Capital Partners
Ron Whitmire EnerVest Ltd.
Editorial Creative Director Jason T. Blair
Production Coordinator Kimberlee Smith
Audience Development Jesse Fyler
jessef@pennwell.com

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Official Publication

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EDITORS COMMENT

Saudi Arabia feeling the heat


its share of the petroleum market by increasing production
to feel what its like to have the oil price rug
levels in a weak market. They believed this would cause some
pulled from under its feet. For the past sevof the high-cost shale producers to go away. The Saudi energy
eral years, OPEC aka Saudi Arabia has
minister, H. E. Khalid A. Al-Falih, persuaded his OPEC counpursued a policy of increased oil production
terparts to go along even though it wasnt necessarily in their
in a low-demand, low-price environment
best interests to do so.
in order to curtail burgeoning North AmeriThe subsequent pain the Saudi policy inflicted on its memcan oil production and retain market share.
bers is unprecedented, particularly in countries like Nigeria
DON STOWERS
CHIEF EDITOR OGFJ
Here are the results of that policy:
and Venezuela with developing economies and little cash
1. Canadian and American oil producers have cut production
reserves. Frankly, Im surprised there hasnt been an uprising
levels, and some mainly small- and mid-cap firms have
within the cartel by some of its poorest members. However,
declared bankruptcy. However, the decline in income forced
Saudi Arabia and its Gulf allies continue to hold all the cards.
the firms to find greater cost efficiencies, which has enabled
That is, perhaps, until now as the Kingdom begins to see the
them to produce crude more economically at lower prices.
downside to long-term low oil prices.
Many shale producers, especially those operating in the
From the shale producers point of view, a rising tide lifts
Permian Basin, say they can produce crude economically
all boats. As Rick Muncrief, president and CEO of WPX Energy,
at $50/bbl and lower and plan to ramp up drilling and
told me recently in an interview for this months cover story,
production levels in 2017.
he would like to see oil prices stabilized at $50 to $60 per barrel
2. OPEC members such as Nigeria, Alfor the next 12 months. He thinks this
geria, Libya, and Venezuela have been Any agreement or non-agreement level of pricing will improve the health
suffering through the low oil prices reached during the OPEC talks will of service companies and other industry
at least as much as North American have a profound influence on producers vendors. Thats when you start seeing
producers. The US consumes a lot of and consumers of petroleum products. real growth again, Muncrief noted.
the oil and natural gas produced here, The difference this year is that Saudi
As we prepare to go to press with this
so while petroleum producers suf- Arabia now has the incentive to see issue of OGFJ, NYMEX oil futures are
fered, US industrial, commercial, and that a deal gets done.
trading at about $45, and Brent is about
individual consumers received enor$3 more. Prices in this range hold a highmous benefits from cheap oil and gas. The US economy has
risk potential for producers, according to several industry
been outperforming that of just about every other nation
analysts.
on earth. Most of the OPEC nations are much more depenOPEC is slated to meet in Vienna on Nov. 30 amid discusdent on income from petroleum exports, which makes them
sions about an OPEC deal to curtail production. So far, it apmore vulnerable to low oil prices.
pears that the two main adversaries within OPEC, Iran and
3. Saudi Arabia, with its enormous conventional oil reserves
Saudi Arabia, are hardening their positions. Iran steadfastly
felt it could outlast the upstart shale players in the US and
refuses to make production cuts, and the Saudis are insisting
Canada. Initially, their plan worked, mainly because many
that Tehran must be willing to participate in any agreement.
of the shale producers had over-leveraged their companies
Iran and Iraq have their reasons for not wanting to cut or
in order to grow faster. However, the prolonged industry
cap production levels. The government in Baghdad wants an
downturn has taken its toll on the Kingdom as well. The
exemption from a supply deal and cites the urgency of its curSaudi governments budget deficit has soared to about onerent offensive against ISIS. Iran seeks special treatment since
fifth of its total economic output year despite $57 billion in
it has finally started to ramp up production following years of
spending cuts for the current fiscal year. That amounts to
crippling economic sanctions from the West.
roughly twice the size of the US budget deficit in 2009, the
While OPEC is trying to resolve its internal differences, the
worst year of the so-called Great Recession, according to a
cartel has asked non-OPEC producers, including Russia, to
recent Wood Mackenzie report. Low oil prices have forced
reduce their output as well. To date, Russia, which has subSaudi Arabia to spend $180 billion in financial reserves,
stantial economic challenges of its own, has stiffly resisted
which has caused the Middle Eastern nation to rethink its
any effort to reduce its supply.
OPEC production strategy. Wood Mac estimates that Saudi
Any agreement or non-agreement reached during the OPEC
Arabia needs a $92/bbl oil price in order to balance its
talks will have a profound influence on producers and consumbudget.
ers of petroleum products. The difference this year is that
There are always at least two sides to every issue, and from
Saudi Arabia now has the incentive to see that a deal gets
the Saudi perspective, the government felt it needed to protect
done.
THE KINGDOM of Saudi Arabia is starting

DECEMBER 2016

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CAPITAL PERSPECTIVES

Upstream E&P startups


HURDLES EXIST, BUT START-UP E&PS CAN AND DO ACQUIRE ASSETS AND SECURE FUNDING
JOSEPH C. DACHES, FORT WORTH, TX

START-UP E&PS FACE many hurdles and for many, those

hurdles will be insurmountable, but a select few will cross


the finish line acquiring assets and securing funding. Even
if a new start-up management team obtains an LOI, even in
the very best basins, it many not be enough to guarantee
capital funding. To complete the process and secure capital
funding, the management team must demonstrate a proven
track record, appropriate industry experience, and the
management teams capability to execute on a business
model vetted through the prospective capital partner.
FUNDING

For a new E&P startup team, acquiring private equity (PE)


sponsorship is akin to finding the Holy Grailmany are
searching, but few will find it. The elusive and exclusive
prize of PE sponsorship goes to the exceptional team with a
proven track record and not individuals, no matter how experienced or talented the individual(s) appear to be. So how
can a new team without a proven history of creating value
and solid investor returns secure PE funding?
At a minimum, the startup team should be able to demonstrate a technical understanding of pricing and risk and
how sensitivities to pricing, cost and well economics will
affect value of the transaction at purchase and exit. Additionally, management will need to be experienced and be
able to demonstrate how their experience will correlate to
value.
PE firms, will rightfully expect the teams they support
and sponsor to possess the requisite industry experience.
Additionally, successful management teams need to possess an appropriate work-ethic, integrity and egos that do
not prohibit success. The management team will also need
to demonstrate how they will successfully execute diligence
and how they will successfully integrate the asset (Ops,
Land, Engineering, Accounting, etc.) with minimal miscues
on governance and compliance.
SOURCING PROSPECTS

As important as funding is for a new management team, it


is equally important to possess the ability to successfully
source E&P assets. This takes a combination of strong industry relationships, hard work and occasionally some oldfashioned luck.
Finding risk-appropriate E&P prospects that match the
goals of a management team and also align with the expectations of a PE sponsor can be tricky.For a startup looking
to take down their first acquisition, it can be especially
complicated. Practically speaking, the informed startup
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management team will thoughtfully establish minimum


criteria to be considered before a full evaluation of a prospect begins.The startup E&P team will want to be opportunistic, of course; however, they should have a target and focus with minimum acceptable criteria thresholds.Prospect
screening criteria should include a management view on
operated vs. non-operated properties, producing with development opportunity, PDP run-off, etc., and they will also
identify a general set of risks that are acceptable and also a
set of risks that might deem a prospect to be a non-starter.
If youre not in the energy industry, you might hold a view
that oil and gas professionals are risk takers. While it is true
that energy professionals embrace business risk, it is also
true that we spend a lot of resources and time evaluating
risk.The oil and gas industry possesses some of the brightest minds dedicated to the science of geology, engineering
and finance in order to understand and measure risk and,
where appropriate, how to mitigate definable risk.
A startup team fully capable of evaluating geology, engineering, operations, accounting, land and finance issues is
rare and exceptional.Unfortunately for startup E&P teams,
risk assessment and evaluation is most often the Achilles
Heel. Teams recognizing shortcomings or holes in their internal expertise will and should rely on third-party experts.Teams that dont recognize their shortcomingswell,
they will have a host of other issues.
From the perspective of evaluating prospects, it would
be prudent to establish thresholds of acceptable levels of
risk and as I pointed out above, it will be equally important
to possess the resources capable of the evaluation. From a
risk perspective, it is the combination of expertise and experience that allows startup teams to successfully navigate
through risk assessment as well as the value of the prospect. By way of example, some teams will identify a prospect possessing retrograde condensate characteristics and
consider this risk a non-starter while other teams may see
this as a manageable risk that has appropriate upside
value.
Once a prospect has passed the initial screening, the
heavy lifting can begin.The geoscience team can begin determining water and oil saturations, porosity, structure and
formation continuity, and the engineers, land, operations,
legal, finance, and accounting teams can begin to take their
respective deep dives. A successful team will work together
to identify risk, value, viability and opportunity.
One of the principal goals for a new E&P startup will be
to keep the pipeline of prospect opportunities full.As you
can imagine, it is important that a new startup utilize all
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CAPITAL PERSPECTIVES

sourcing options available to them. While is not practical


for a team to evaluate every opportunity that comes their
way; however, there is benefit to reviewing as many as possible prospects within their target basin. Many of the prospects have proprietary information that is only available
through the execution of a confidentiality agreement between the seller and the potential buyer. In addition to evaluating the specific prospect, this proprietary data can be of
great benefit when considering future prospects within the
same basin. This detail analysis performed by the management will further increase team basin knowledge and
expertise.
One sourcing option is the utilization of E&P A&D shops.
Typically, these processes include proprietary technical information that is somewhat gussied up for selling at the
highest possible price. Obviously, the burden remains with
the buyer to work through technical risk to evaluate purchase price value as well as exit valuations.Once the startup team settles on a bid value, they will need to present
their value and view of the asset to their potential PE partner. In order for a bid to be supported by a PE firm, the bid
will have to be at a value that enables the PE firm to meet
their internal hurdles for exit IRR and MOIC.A pre-tax exit
IRR of 35% and a minimum of 3.5x MOIC are common,
which can push the cost of capital for a startup E&P company utilizing PE funding well north of 10%.With PE return
hurdles embedded in a bid, the startup E&P company will
likely struggle to win a bid when competing against a public
company whose cost of capital is lower at around 4-6%.
What is interesting is that many of the middle-market
companies who would otherwise be engaged in reviewing
these transactions are not able to participate because of
limited access to capital and financing and/or dealing with
liquidity problems stemming from the drop in commodity
prices.Having said that, there is still plenty of competition
and the public companies who are in the market acquiring
assets in plays like the Permian are aggressively acquiring
and their shareholders are rewarding them even when they
set new high-water mark metrics, flowing BBL and acreage
values. This factor alone puts the startup E&P company in
an unenviable position in these highly desirable basins, and
in certain instances, has created unreasonable seller value
expectations. The prices achieved on these transactions
virtually eliminate PE funding as a capital option.
WHERE DO STARTUP TEAMS SOURCE ACQUISITIONS?

Many opportunities can come from sellers who are not running their assets through an A&D shop and this is the most
likely scenario for a startup to match prospect with PE capital.To find out about these opportunities, the startup team
must tap into and develop its network of relationships
within the industry, from oil and gas professionals to banks,
attorneys, engineers, etc. Doing so takes a combination of
finesse, patience, and time. The startup team must reach
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OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

Even if a new start-up management team obtains


an LOI, even in the very best basins, it many not
be enough to guarantee capital funding. To complete the process and secure capital funding, the
management team must demonstrate a proven
track record, appropriate industry experience, and
the management teams capability to execute on
a business model vetted through the prospective
capital partner.
out to these individuals and let others know who they are,
what they are trying to accomplish, and how the team will
secure funding for an acquisition.
An example of a prospect that might be sourced in this
space could be asset owners looking to quickly transact for
liquidity reasons, or when their ability to fund a capital budget is limited. There are many examples of why these assets
dont go through an A&D shop, but the key is the ability to
quickly get through evaluation in order to close on the opportunity.In many of these instances, you begin with a simple map, an LOS statement and, if youre lucky, an internally
developed reserve report. There can be real gems in this
scenario, but there can also be dogs and goat pasture.
The good news in these scenarios is that the bid to ask
spread will not be as wide as it would be if the asset was in
an A&D shop process. While the seller will most likely be
aware of the high-water mark pricing, not having the same
level of competition for an asset will allow for a better takedown point for the startup team.
Lets not forget the auction houses and web sites.The opportunities presented in these venues are from all types of
clients ranging in an even larger variety of value. The auction processes can be efficient and quick.
Without a doubt, there are significant hurdles for a startup E&P company to cross; however, start-up E&P companies can and do acquire meaningful assets within current
market conditions. With a talented team of hard working,
like-minded individuals who play off each others strengths
and have the maturity to recognize where they need help, a
startup team can be successful in acquiring assets and securing capital funding.
ABOUT THE AUTHOR

Joseph Daches most recently served as CFO of


Magnum Hunter Resources where he finished
his tenure by guiding MHR through a restructuring that equitized approximately $1.3 billion
of liabilities. He has over 25 years of experience
in directing strategy, accounting, and finance,
primarily for small and mid-size oil and gas companies.
Daches experience includes O&G and SEC reporting,
capital markets, budgeting, business valuations and
acquisitions and divestitures. He holds a BS in accounting
and is a CPA.
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Steve Allen | Dreamstime.com

Share issuances in vogue in 2016


US COMPANIES ISSUING SHARES REACHES 3-YEAR HIGH IN 2Q
HANNAH MUMBY, EVALUATE ENERGY, LONDON

THE AMOUNT OF CASH RAISED by 68 US oil and gas

companies via a net issuance in new shares soared to a


three-year high of $19.4 billion in Q2 2016, according to
Evaluate Energys new study focused on US oil and gas company cash flow.
In response to changing attitudes to debt and fewer asset
sales, companies have been more inclined to issue shares to
source external cash in recent periods. (For purposes of this
report, external cash is all cash raised excluding operating
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cash flow. This includes net increases in debt, net issuances


of shares, and net sales of assets or business units.)
This trend started in Q1 2015, as the commodity price
downturn began to impact cash flow, and has become more
pronounced ever since.
Cash sourced via net share issuances made up 43% of all
external cash raised in Q2 2016. This stands in stark contrast
to periods before the downturn. In Q3 2014, only 16% of
external cash raised came from net share issuances.
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F1: MAIN SOURCES OF CASH IN-FLOW EXCLUDING CASH FROM


OPERATIONS, ROLLING 12-MONTH TOTALS ($MM) 68 US COMPANIES
90,000
80,000

$ Million

70,000
60,000
50,000
40,000
30,000
20,000
10,000
0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013
2014
2015
2016

Net increase in debt

Net issuance of shares

Net asset/business unit sales

Source: Evaluate Energy Study Cash Flow in US Oil & Gas

F2: CASH FLOW ANALYSIS, ROLLING


12-MONTH TOTALS 68 US COMPANIES
140,000

120

120,000

100

100,000

80

80,000

60

60,000

40

40,000

20

20,000
0

$/boe

$ Million

This finding is among several key


conclusions of the new study that unpacks the altered relationship between
cash flow and capital expenditure in
the US oil and gas space.
Of course, the value of the individual
shares being sold will be much lower
than in 2013 or 2014, but US oil companies have clearly had success selling
shares in recent periods despite the
challenging climate, perhaps looking
to benefit from bargain hunting investors looking to enter the oil market at
a low price.
The movement towards share issuance in part reflects the oil price drop
and a major reduction in the ability to
secure debt financing, given continued
market uncertainty. Since Q3 2014, the
amount of cash raised by US oil and
gas companies via a net increase in
debt dropped by almost two-thirds to
US$14.2 billion. The study discovered
that, in fact, the 68 US companies raised
the least amount of cash in Q2 2016
through net debt increases than in any
other quarter over the entire three-year
period.
Cash raised via net asset or business
unit sales also dropped in 2016 compared to periods before the downturn.
The 68 companies raised 69% less cash
from net asset or business unit divestitures in Q2 2016 compared to Q3 2014,
the final period before the price downturn began.
This raising of external finance, and
the movement towards issuing shares,
has been necessary for US oil and gas
companies because their operating
cash flow is not covering their capital
expenditure needs. While this internal
financing gap between operating cash
flow and CAPEX was at its tightest in
Q2 2016 compared to any other period
over the last three years, external cash
in some form was still required.
Of course, CAPEX is not the only
cash outflow that oil and gas companies have seen piling up in recent times.
However, it is encouraging that the
majority of the 68 companies, despite
their varying financing gaps, were actually able to cover all cash outgoings

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013
2014
2015
2016
Cash flow from operations
Capital expenditures

WTI ($/boe)
Henry Hub ($/boe)

Source: Evaluate Energy Study Cash Flow in US Oil & Gas

in Q2 2016 with a combination of operating cash flow and external cash sources
and many of the companies have a successful share issuance to thank.
ABOUT THE AUTHOR

Hannah Mumby is a senior oil and gas analyst with Evaluate Energy.
She has a degree in Geology and a Msc. in Mineral Extraction. In her
role with Evaluate Energy, Mumby has analyzed oil and gas company
accounts and performance for the past 18 years. The Evaluate Energy
database includes over 25 years of financial and operating data for
more than 300 of the worlds biggest and most significant oil and gas
companies, including full coverage of the US E&P market. Evaluate Energy also
covers upstream, downstream, midstream and oil service sector merger and
acquisitions.

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12/5/16 1:21 PM

SECOND THOUGHTS

Trump, NAFTA and energy


LOVE HIM, HATE HIM, dont know what to

tions. That is an important benefit because much of the equipmake of himDonald Trump is Presidentment that is required to perform oil and gas activitiesfor
elect and a Trump presidency is likely a posiupstream, or equipment to build midstream and downstream
tive for the North American oil and gas ininfrastructure and power projectscomes from the US. I dont
dustry as a whole.
anticipate restrictions being implemented in this front, but, if
Campaigning in Gettysburg, Pennsylvania
for any reason certain restrictions are placed on the importation
in late October, Trump spoke about his thenof that type of equipment, it could have an impact on expected
MIKAILA ADAMS
plan
for
his
100-day
action
plan
to
Make
investment in the sector.
EDITOR OGFJ
America Great Again. One proposed task:
The other indirect effect that a review or repudiation of
to lift the restrictions on the production of $50 trillion dollars
NAFTA could have would be on Mexicos GDP growth. At the
worth of job-producing American energy reserves, including
end of the day, both the power sector and the production of oil
shale, oil, natural gas and clean coal. Policy changes in this
and gas in Mexico impact the growth of the Mexican economy.
regard would likely benefit North American oil-weighted proSo to the extent that the growth of the Mexican economy is
ducers and those in the midstream space. In the same speech,
affected by any type of revisions to NAFTA, an impact on how
Trump noted his intention to renegotiate NAFTA or withdraw
much investment we would need in the sectors could be made.
from the deal under Article 2205.
As Mexico is a developing economy, there is great market
There are numerous US energy companies involved, in varipotential for US energy companies and the oil and gas produced
ous stages and capacities, in the
within, which fits well with Trumps
energy business in Mexico. For one, To view the impact of a potential modifistated energy industry goals. Rathere are projects to transport natu- cation of NAFTA on the long-term is more
mos said that, at least in the foreral gas from the US to Mexico, and complex and unclear at this stage. We dont
seeable future, there is a need for
pipelines being builtsome in have full visibility yet on what specific lines
power and gas and some oil-related
Texas and some in Mexico. What the Trump administration would actually seek, products in Mexico. By US Energy
could revisions or a complete US but the above represents a few of the issues
Information Administration calcuwithdrawal from NAFTA mean for the new administration should analyze before lations, US natural gas pipeline
the
various
w o r k i n g considering any revisions to NAFTA.
exports to Mexico from the US
relationships?
were up approximately 33% year
I reached out to Ariel Ramos, a
over year in April 2016, reaching
partner in the banking and finance practice and global energy
102.6 billion cubic feet.
group of Mayer Brown for his expertise and thoughts on the
There are still a lot of opportunities to import power capacity
matter. Speaking from his office in Mexico City, Ramos first
from the US, specifically from the Texas market where theres
provided a bit of history.
plenty of gas and power available, at least for the system in
The first point on background, he said, is that while NAFTA
Mexico. With respect to how much capacity consumers or
included certain specific energy provisions, it excluded NAFTA
industrial companies will need in the foreseeable futurewe
benefits from energy because of the Mexican energy regime at
still have a deficit of gas in Mexico that needs to be covered but
the time that NAFTA was approved included restrictions on
any effects in the growth expectation and investment could
private investment in oil and gas and power which were grandhave an impact, Ramos continued.
fathered under NAFTA. Following the constitutional reform in
Another factor is jobs. Trump campaigned on job-producing,
2013 and the subsequent reforms of applicable legislation, there
and as Ramos told me, NAFTA has created jobs both in the US
has been discussion about NAFTAs impact with respect to the
and Mexico and many US products are targeted to the Mexican
energy sectors in Mexico. The official interpretation from the
market. In the US, more than six million employees are directly
Mexican government was that NAFTA did not apply to the
related to the production of NAFTA-related products. And,
energy sectors and, as a result, the Mexican government has
there are approximately 60,000 US companies active in Mexico
the ability to retain and impose certain restrictions (such as
in different capacities, he detailed.
with respect to national content).
To view the impact of a potential modification of NAFTA
He told me that the potential impact of any renegotiation of
on the long-term is more complex and unclear at this stage. We
NAFTA with respect to energy would be indirect on two fronts.
dont have full visibility yet on what specific lines the Trump
On one hand, he said, most of the equipment and resources
administration would actually seek, Ramos told me as we ended
Mexico needs for the energy sector come from the US. Importathe call, but the above represents a few of the issues the new
tion of those under NAFTA are subject to minimum or no
administration should analyze before considering any revisions
customs duties and taxes or other kind of foreign trade restricto NAFTA.
8

1612ogfj_8 8

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12/5/16 1:21 PM

Delivering
value up and
down stream
PwCs Energy team is one of the largest professional
services networks in the world with dedicated industry
resources, serving more than 2,500 oil and gas clients
of all sizes, from every segment of the businessfrom
upstream to downstream. For over a century, we have
helped energy companies succeed.
Were a network of separate firms in 157 countries with
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quality in assurance, tax and advisory services. We can
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2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see
www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with
professional advisors.

1612ogfj_9 9

12/5/16 1:21 PM

UPSTREAM NEWS

L to R Energy Ventures
partner Greg Herrera and
Tomas Hvamb, Energy
Ventures investment
director.

ENERGY VENTURES EARMARKS $200M


FOR NORTH SEA INVESTMENT
Independent private equity firm Energy Ventures has earmarked $200 million to help boost North Sea businesses
during challenging times for the oil and gas industry.
Tomas Hvamb, Energy Ventures Aberdeen-based investment director, said: Energy Ventures is one of the few oil
and gas private equity funds investing at this time. In the
past 20 months we have made three platform investments
in the North Sea and a total of 11 investments including
add-ons in the same period.
The additional funding of $200 million which we have
set aside is testament to the commitment we have to the
area. We believe in the North Sea and the opportunities it
continues to offer for domestic and international growth.
We look to partner with talented management teams in
service and technology companies with high growth potential
and seek to invest between $10 million $40 million in each
company.
Energy Ventures will invest in proven companies where
we can see where our capital can provide a strong capital
base to support the company and management in their next
10

1612ogfj_10 10

growth phase. At a time when activity levels in the industry


have been down, many companies are under pressure from
the banks to de-lever their balance sheet and we can assist
in this.
ROWAN, SAUDI ARAMCO TO CREATE OFFSHORE
DRILLING COMPANY
Rowan Companies plc and the Saudi Arabian Oil Company
(Saudi Aramco) have signed, through their subsidiaries, an
agreement to create a 50/50 joint venture to own, operate,
and manage offshore drilling rigs in Saudi Arabia.
The new joint venture company will use Rowans established business in Saudi Arabia as its base with a scope of
operations covering Saudi Arabias existing and future offshore oil and gas fields. The new company is anticipated to
commence operations in the second quarter of 2017.
At commencement of operations of the new company,
Rowan will contribute three of its jack-up drilling rigs and
Saudi Aramco will contribute two of its jack-up drilling rigs.
Rowan will contribute an additional two jack-up rigs as they
complete their current Saudi Aramco contracts in late 2018.
The new company will also manage the operations of five
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UPSTREAM NEWS

Rowan jack-up rigs currently in Saudi Arabia, until their associated drilling contracts expire, which then may be released, leased by or contributed to the new company thereafter. Rowan and Saudi Aramco have committed the new
company to purchase future newbuild rigs that will be constructed in Saudi Arabia.
Latham & Watkins LLP represents Rowan Companies plc
in the transaction.
In a flashnote following the announcement, Evercore ISI
analysts commented on the JV, calling it a nice, creative
approach with an important customer.
As part of the Kingdoms 2030 Vision, the JVs leadership will be comprised by a Rowan nominated CEO and head
of operations while Saudi Aramco will nominate the Chairman
of the Board and CFO. All Rowan rig personnel working in
Saudi Arabia will continue to work for the new company, and
the new company will begin hiring and training a domestic
workforce to meet its long term growth objective.
The analysts continued, There are currently 44 jackups
contracted in Saudi Arabia, of which two are owned by Saudi
Aramco (SAR 201, 202). Rowan is Aramcos largest independent drilling contractor at nine units, followed by Ensco and
Shelf Drilling with six jackups each.

CHEVRON STARTS PRODUCTION AT UK ALDER FIELD


Chevron North Sea Ltd. has started production at Alder, a
high-pressure, high-temperature (HPHT) gas condensate field
in the Central North Sea.
First gas at Alder represents a significant milestone for
Chevron and highlights our commitment to investing and
developing resources in the UK, said Greta Lydecker, managing
director, Chevron Upstream Europe. The safe and successful
completion of this project was underpinned by strong collaboration between Chevron and Alder co-venturer ConocoPhillips.
Alder supports our goal of helping maximize the economic
recovery of the UK, adds significant production to our portfolio,
and helps extend the field life of Britannia, an important asset
to Chevron in the North Sea.
Alder is a single subsea well tied back, via a 28 kilometer
pipeline, to the existing ConocoPhillips-operated Britannia
Platform, in which Chevron holds a 32.38% non-operated
working interest. The project has a planned design capacity of
110 million cubic feet of natural gas and 14,000 barrels of condensate per day. Production from the HPHT Alder Field is
expected to ramp up over the coming months.
More than 70% of the Alder development work was executed
by UK based companies.

Adler Field

DECEMBER 2016

1612ogfj_11 11

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

11

12/5/16 1:21 PM

UPSTREAM NEWS

PFLNG SATU

FIRST GAS FOR PETRONAS FIRST


FLOATING LNG FACILITY, PFLNG SATU
Petronas first floating liquefied natural gas (LNG) facility, PFLNG
SATU achieved its first gas milestone on November 14, 2016,
from the Kanowit gas field, offshore Sarawak.
The introduction of gas from the KAKG-A central processing
platform at the field ignited the PFLNG SATU flare tower.
Petronas hopes to unlock gas reserves in Malaysias remote
and stranded gas fields.
Petronas acting vice president LNG Assets, Development
& Production Adnan Zainal Abidin said the first gas milestone
signified the commencement of commissioning and startup
for the floating LNG facility that will soon progress towards
commercial operations and first cargo.
PFLNG SATU made its 2,120 nautical mile journey from Okpo,
South Korea to the Kanowit gas field on May 14, 2016, for its
offshore phase of commissioning. Fitted with an external turret
for water-depths of between 70 meters and 200 meters deep,
PFLNG SATU will extract natural gas via a flexible subsea pipeline for the liquefaction, production, storage and offloading
processes of LNG at the offshore gas field.
Designed to last up to 20 years without dry-docking, PFLNG
SATU has the flexibility to be redeployed to multiple locations
to better access marginal and stranded gas fields of
Malaysia.

12

1612ogfj_12 12

AKER BP STARTS UP VIPER-KOBRA OFFSHORE


NORWAY
Aker BP has started production from the Viper-Kobra structures
via a subsea tieback to the Alvheim FPSO in the Norwegian
North Sea.
Development costs came in on budget at around $217
million, and included drilling of two wells, subsea installations,
pipelines, and hook-up.
Kobra was discovered in 1997 in production license 203, and
Viper was discovered in 2009 in production license 203 in 2009.
However, the accumulations constitute part of the Alvheim
field and development was therefore included in the plan for
development and operation for Alvheim.
The scope comprised a new subsea installation with a pipeline tied into the Volund manifold. The four well slots accommodate one well each on Viper and Kobra, with two slots remaining for potential future wells in the area.
Aker BP estimates that the two reservoirs each contain about
4 MMbbl of recoverable oil including gas. The total recoverable
is 9 MMboe.
Aker expects the initial production rate to average approximately 15,000 boe/d.
Aker BP operates the Alvheim license in partnership with
ConocoPhillips and Lundin Norway.

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A TRUSTED
PLATFORM FOR
DIVESTMENT
With a network of more than 20,000 active accredited
buyers, EnergyNet is the trusted divestment platform of
the industry.

Our Energy. Our Network.

YOUR Success.

Ask the EnergyNet representative


in your area for divestment advice.

Historically, the last half of the year is the most active for
divestment, and this year is proving to be no different.
We stand ready to serve our customers who have
year-end divestments, and we greatly appreciate the
opportunity to serve.
Please note: Customers have time to assure their
property is sold by Dec. 31, 2016.

Our team shown from left to right:


ROCKIES/WESTERN U.S. PERMIAN BASIN

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720.459.2072
ryan.dobbs
@energynet.com
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832.654.6612
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720.370.2848
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405.255.5444
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CONTINUOUS ONLINE AUCTION RAPID-CYCLE SEALED BID SALES


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These risks include commodity price uctuations and unforeseen events that may affect oil and gas property values.

1612ogfj_13 13

877.351.4488 energynet.com
12/5/16 1:21 PM

MIDSTREAM NEWS

B RIEFS
MAGELLAN
PETITIONS TO CREATE
MARKETING AFFILIATE
On November 14, 2016,
Magellan Midstream
Partners LP filed a petition with FERC to create
a Marketing Affiliate in
order to move crude oil
out of the Permian. Magellan is requesting that
the Commission act on
the petition by no later
than February 13, 2017.

14

1612ogfj_14 14

SUNOCO LOGISTICS TO ACQUIRE


ENERGY TRANSFER PARTNERS
Sunoco Logistics Partners LP and Energy Transfer
Partners LP (ETP) have agreed to merge. Sunoco
Logistics will acquire ETP by SXL in a unit-for-unit
transaction that was approved by the boards of
directors and conflicts committees of both partnerships and is expected to close in the first
quarter of 2017, subject to receipt of ETP unitholder approval and other customary closing
conditions.
Under the terms of the transaction, ETP
unitholders will receive 1.5 common units of SXL
for each common unit of ETP they own. This
equates to a 10% premium to the volume weighted average pricing of ETPs common units for the
last 30 trading days immediately prior to the
announcement of the transaction.
As SXL will be the acquiring entity, the existing
incentive distribution rights provisions in the SXL
partnership agreement will continue to be in
effect, and Energy Transfer Equity LP will own the
incentive distribution rights of SXL following the
closing of the transaction.
As part of this transaction, ETE has agreed to
continue to provide all the incentive distribution
right subsidies that are currently in effect with
respect to both partnerships.
The transaction is expected to be immediately
accretive to SXLs distributable cash flow per common unit and is also expected to allow the combined partnership to be in position to achieve
near-term distribution increases in the low double
digits and a more than 1.0x distribution coverage
ratio.
The transaction is expected to provide significant benefits for SXL and ETP unitholders as the
combined partnership will have increased scale
and diversification across multiple producing
basins and will have greater opportunities to more
closely integrate SXLs natural gas liquids business
with ETPs natural gas gathering, processing and
transportation business. SXL and ETP expect that
the transaction will allow for commercial synergies
and costs savings in excess of $200 million annually by 2019.
The transaction is also expected to strengthen
the balance sheet of the combined organization
by utilizing cash distribution savings to reduce
debt and to fund a portion of the growth capital
expenditure programs of the two partnerships.
ETP and SXL have spent approximately $15
billion in organic growth capital over the past
several years, and these expenditures, combined

with the completion of other major capital projects currently in progress, are expected to continue to generate strong distributable cash flow
growth.
The combined partnership is expected to be
the second largest MLP as measured by enterprise
value.
At the closing of the transaction, the CEO,
chief commercial officer, president and CFO of
the combined partnership will be Kelcy Warren,
Mackie McCrea, Matt Ramsey and Tom Long,
respectively, and it is expected that Mike Hennigan and other members of the SXL management team will continue in leading management
roles of the combined company with the SXL
business headquartered in Philadelphia.
The news comes on the heels of the strategic
joint venture between Sunoco Logistics Partners
LP and ExxonMobil announced November 9. Per
the agreement, the companies will form Permian
Express Partners LLC to combine certain of their
key crude oil logistics assets. Sunoco Logistics
will contribute its Permian Express 1, Permian
Express 2 and Permian Longview and Louisiana
Access pipelines. ExxonMobil will contribute: its
Longview to Louisiana and Pegasus pipelines;
Hawkins gathering system; an idle pipeline in
southern Oklahoma; and its Patoka, Illinois
terminal.
Concurrent with the transaction, ExxonMobil
and its affiliates will enter into a preferred provider
agreement with the joint venture. Sunoco Logistics will be the majority owner and operator of
the joint-ventures assets. Upon closing, ownership in Permian Express Partners LLC will be approximately 85% SXL and 15% XOM.
WHITING PETROLEUM TO SELL
NORTH DAKOTA MIDSTREAM ASSETS
Whiting Petroleum Corp. has entered into purchase and sale agreements to sell its 50% interest
in its Robinson Lake natural gas processing plant
and associated natural gas gathering system
located in Mountrail County, North Dakota and
its 50% interest in its Belfield natural gas processing plant and associated natural gas, crude oil
and water gathering systems located in Stark,
Billings and Dunn Counties, North Dakota. From
April through September 2016, these plants had
average daily throughput of 132 MMcf per day.
An affiliate of Tesoro Logistics Rockies LLC has
agreed to purchase the assets for $700 million,
pending regulatory approval. Whitings share of
the sale price would be approximately $375 mil-

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MIDSTREAM NEWS

lion. The transaction is expected to close in the


first quarter of 2017.
James J. Volker, Whitings Chairman, President
and CEO, commented, We expect this sale to
further strengthen our balance sheet and provide
us with additional financial flexibility to invest for
growth in Whitings top tier producing assets in
the Williston and DJ Basins. This sale aligns with
our ongoing strategy to divest non-core midstream assets and focus capital in the companys
highly productive upstream business.
Midstream divestiture has been discussed by
Whiting management for a year or more so the
deal itself was not a surprise, noted Brian T. Velie
of Capital One Securities after the announcement.
The price, however, did surprise to the upside
and more than doubled the $180MM of value we
were modeling. The extra cash in the door increases our NAV by $1 to $13/share, Velie said.
Proceeds will delever the balance sheet, taking
our YE17 net debt to EBITDA estimate from 4.8x
to 4.3x. YE18 balance sheet leverage drops in
similar fashion from 4.0x to 3.6x. A positive update
that addresses WLLs most significant headwind
(leverage) to a more significant degree than we
were expecting to be possible from such a sale,
he said.
GENOIL TO DEVELOP, CONSTRUCT
PROJECTS IN RUSSIA, CHECHNYA
Genoil Inc., a publicly traded clean technology
engineering company for the petroleum industry,
has signed a $50 billion Letter of Intent to develop
oil fields and construct clean technology upgraders, refineries and pipelines in Russia. The project
will incorporate Genoils clean technology hydroconversion (GHU) process, and mark the first time
that Genoil has provided a complete integrated
project, from the development of oil fields to the
production of cleaner fuels. The scope of the
project is to produce 3.5 million barrels per day.
Genoils hydroconversion process improves
upon the existing data-verified Fixed Bed Reactor
technology, which is widely used worldwide. Currently, 85% of all desulphurization is taking place
worldwide via hydroconversion. Genoils investment into hydroconversion projects can significantly increase the desulphurization, demetalization and denitrogenization conversion rates, and
increase operating efficiencies by 75%.
In addition to the development of the oilfields
and construction of the technology, the parties
involved will also explore linking this new project
to existing pipeline networks in the region. FiDECEMBER 2016

1612ogfj_15 15

nancing will be provided in full from Chinese


banks to the Russian companies involved.
As agreed in the LOI, Genoil will be responsible
for the design and construction of six million
tonnes per year of new refinery capacity in
Chechnya. To facilitate this, Genoil will organize
a large consortium of Chinese engineering and
services companies to provide the necessary
support and project guarantees. In addition, Genoil will arrange for a Chinese insurance company
to insure the project.
The LOI has been signed by the President of
the Board of Directors of Grozneft, a former official
in the administrative department of the Russian
Federation. The Russian Government and the
Ministry of Fuel and Energy of the Russian Federation, as well as other required ministries and
departments will give their support to the project
to ensure timely completion. The project will be
listed in a trade agreement, pact or cooperation
agreement between Russia and China.
Genoil will be the master contractor in charge
and in control of the project. Fuel produced from
the projects will be exported to China through
secured long-term contracts of up to 30 years.
EXXONMOBIL TO INCREASE BEAUMONT
POLYETHYLENE CAPACITY BY 65%
ExxonMobil plans to add a new production unit
at its Beaumont polyethylene plant that will increase capacity by 65% or approximately 650,000
tonnes per year to meet growing demand for
high performance plastics.
Construction of the new unit has begun at the
plant, where current polyethylene production
capacity is one million tonnes per year. Startup
is expected in 2019.
The availability of vast new supplies of US
shale gas and associated liquids for feedstock
and energy is a significant advantage that enables
expansion to meet strong global demand growth
in polyethylene, said Cindy Shulman, vice president of ExxonMobils plastics and resins
business.
The Beaumont project builds on supply advantages created by ExxonMobils expansion of
its Mont Belvieu Plastics Plant in Texas, where
two similar polyethylene units are being added.
Combined, this multi-billion-dollar investment
will increase the companys US polyethylene production by 40%, or nearly two million tonnes per
year, making Texas the largest polyethylene supply point for ExxonMobil.
The Beaumont expansion project will employ

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

BR I E F S
MARTIN,
VANDERHIDER JOIN
NOBLE BOARD
Noble Midstream Partners LP has appointed
Martin Salinas, Jr. as an
independent director on
the companys Board of
Directors, joining Hallie
A. Vanderhider. Vanderhider has served as an
independent director
since Noble Midstreams
IPO in September. With
the addition, Nobles
board consists of six
directors, including two
independent directors.
Salinas currently serves
as the CEO of Phase
4 Energy Partners Inc.
He previously served as
CFO of Energy Transfer
Partners LP. Vanderhider serves as managing
partner of Catalyst
Partners LLC. Prior, she
worked at Black Stone
Minerals Company LP,
serving most recently as
a member of the board
of directors and as president and COO.

15

12/5/16 1:21 PM

MIDSTREAM NEWS

B RIEFS
PAA COMPLETES
$750M SENIOR
NOTES OFFERING
Plains All American Pipeline LP has completed
an underwritten public
offering of $750 million
aggregate principal
amount of 4.500% senior
unsecured notes due
December 15, 2026, at
a public offering price
of 99.716% with a yield
to maturity of 4.535%.
Total net proceeds of the
offering were approximately $741.3 million.
The Partnership intends
to use the net proceeds
from the offering to
repay outstanding
borrowings under
its senior unsecured
revolving credit facility
and commercial paper
program and for general
partnership purposes.
J.P. Morgan Securities
LLC; BNP Paribas Securities Corp.; Merrill Lynch,
Pierce, Fenner & Smith
Incorporated; Wells Fargo Securities, LLC; BBVA
Securities Inc.; DNB
Markets, Inc.; and SMBC
Nikko Securities America, Inc. acted as joint
book-running managers
of the offering.

16

1612ogfj_16 16

1,400 construction workers and create 40 permanent jobs upon completion, as well as generate
$20 billion in economic activity in the first 13 years
of operation based on 2015 Impact Data Source
estimates.
ExxonMobils previously announced investments at Beaumont include expansion of the
refinerys crude refining capacity in 2015 and,
earlier this year, construction of a new unit to
increase domestic supply of ultra-low sulfur gasoline and diesel.

HOWARD ENERGY PARTNERS SECURES


$353M FOR NUEVA ERA PIPELINE PROJECT
Nueva Era Pipeline LLC, a Howard Midstream
Energy Partners LLC (HEP) subsidiary, has closed
on $353.3 million in project financing for the construction of the Nueva Era pipeline project. A
50-50 joint venture between HEP and Mexico-based energy and services firm Grupo CLISA,
the Nueva Era pipeline project will connect HEPs
existing Webb County Hub in South Texas directly
to Monterrey, Nuevo Len, Mexico. The banks
that provided financing for the Nueva Era project
include MUFG, Santander, Societe Generale,
Sumitomo Mitsui Banking Corp., and
CaixaBank.
Construction activities began earlier this year
on the approximately 200-mile, 36- and 30-inch
Nueva Era pipeline, which will provide seamless
transportation service for approximately 600 million cubic feet per day of natural gas (expandable
to 900 million cubic feet per day), connecting
producers in South Texas directly with end-users
in northern Mexico. The Comision Federal de
Electricidad, Mexicos state-owned electric utility,
is the anchor shipper on the Nueva Era project,
having committed to transport 504 million cubic
feet of natural gas per day on the system for a
25-year term, to help fuel combined-cycle power
plants in Escobedo and Huinal, near Monterrey.
The Nueva Era pipeline also offers natural gas
transportation services to private shippers on an
open access basis. The project is expected to be
completed and in service in the second half of
2017.
Latham & Waktins LLP, Creel, Garca-Cullar,
Aiza y Enrquez and Canales Dvila, S.C. served
as the companys legal advisors on the transaction,
with Milbank, Tweed, Hadley & McCloy LLP and
Galicia Abogados serving as the principal legal
advisors of the lending group.
San Antonio-based Howard Midstream Energy
Partners LLC, dba Howard Energy Partners, is an

independent midstream energy company, owning


and operating natural gas gathering and transportation pipelines, natural gas liquids processing
plants, rail facilities, liquid storage terminals,
deep-water port facilities and other related midstream assets in Texas and Pennsylvania.

DOMINION MIDSTREAM TO ACQUIRE


QUESTAR PIPELINE
Dominion Midstream Partners LP and Dominion
Resources Inc. have come to an agreement in
which Dominion Midstream will acquire Questar
Pipeline LLC from Dominion for $1.725 billion,
including indebtedness of Questar Pipeline.
Dominion Midstream intends to finance the
acquisition various means. One is through the
companys assumption of Questar Pipelines $435
million of outstanding indebtedness. The company also plans equity offerings, including an
underwritten public offering of Dominion Midstream common units representing limited partner
interests in the partnership; commitments received from a group of institutional investors led
by Stonepeak Infrastructure Partners for $137.5
million of common limited partner units and up
to $600 million of convertible preferred units
representing limited partner interests in the partnership that are to be issued privately, and common units and preferred units that are to be issued
to Dominion. The company is also anticipating a
$300 million term loan provided by a group of
banks, allowing Dominion Midstream to repay
an existing term loan currently provided by
Dominion.
Upon closing, the acquisition of Questar Pipeline which owns and operates Federal Energy
Regulatory Commission-regulated natural gas
transmission and storage assets in Colorado, Utah
and Wyoming will be immediately accretive to
Dominion Midstreams distributable cash flow
and supportive of the partnerships intention to
grow distributions to unitholders at a compounded annual growth rate of 22% per year. It is also
expected to more than double Dominion Midstreams existing adjusted EBITDA.
Dominion plans to use proceeds from the
Questar Pipeline dropdown into Dominion Midstream to retire outstanding debt.
The Dominion Midstream GPs Conflicts Committee was advised by Richards, Layton & Finger
PA and Evercore Group LLC. This transaction is
not subject to additional regulatory or other
approvals.

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Energy in a Trump administration


THE INCOMING PRESIDENT FAVORS ENHANCED E&P OF OIL AND GAS
AS A TENET OF ENERGY, ECONOMIC, AND NATIONAL SECURITY POLICY
JASON B. HUTT AND MICHAEL WELLER, BRACEWELL LLP, WASHINGTON, DC

Election. Voters widespread recognition of the climate change


challenge lacked the priority given to issues like the economy
and immigration. And, to the extent energy played a role in the
Rust Belt Revolution and knocking down The Blue Wall, it
favored President-elect Trump withangst over jobs lost in the
coal sector and unions let down by President Obamas rejectionof the Keystone Pipeline.
Candidate Trumps position of minimal regulation and robust
support for domestic energy development proved effective in states
like Pennsylvania,
Ohio, and Michigan.
Candidate Trump stated that he wants to
encourage domestic
energy development to
avoid dependence on
importing energy from
the OPEC cartel or any
nations hostile to our
interest. He also pointed to the need for a
reduction in regulations, the opening of
onshore and offshore
leasing on federal
lands, and rescinding
of President Obamas
executive actions on
climate.
Without a robust campaign platform on energy and environmental matters, the task now is to develop a view into what
President-elect Trump has in mind for the energy industry over
the next four years. We are only few days past the election and
no cabinet appointments have been made as we head to print,
but below is an initial attempt to tease out what to look out for
on a few key energy and environmental issues as the Trump
administration takes shape.
CLIMATE POLICY

On climate, Candidate Trump expressed a degree of skepticism


towards man-made climate change. He suggested that more
investigation of the phenomenon is appropriate and that resources might be better directed towards addressing other
global challenges first, like disease or hunger. The Trump campaign said that the candidate does believe global temperatures
are rising, as did Vice Presidential nominee Mike Pence.
18

1612ogfj_18 18

While some see the recent Paris Climate Agreement as a


likely first target, that agreement is not binding and it comes
with no true legal hooks to mandate implementation. It is
questionable what actually would be gained from withdrawing,
especially when weighed against the political capital President-elect Trump would stand to lose internationally.
With respect to domestic efforts to combat climate change,
President-elect Trump has indicated that he is no fan of the US
Environmental Protection Agency or its proposed regulation
of greenhouse gases, including the Clean Power Plan. Legal
challenges to the CPP
will still be underway
even as the new President is inaugurated.
The CPP is currently being considered in the DC Circuit.
Four judges hearing
that case are potential
candidates for a future appointment to
the US Supreme
Court. Those judges
may therefore delay a
decision as long as
possible to avoid any
recusal arguments if
they become a new
member of the Supreme Court that
hears the case at some point. If the DC Circuit strikes down the
rule, it is likely that the Trump administration simply will not
appeal. If there is not a ruling soon enough or if the court upholds the rule, the Trump administration may seek to revoke
the rule through a notice-and-comment regulatory process.
Lightpainter | Dreamstime.com

ENERGY WAS NOT A CENTRAL ISSUE in the 2016 Presidential

OTHER EPA REGULATORY INITIATIVES

President-elect Trump has set his sights on rolling back more


than just the CPP. During the campaign, his handful of forays
into environmental matters called out EPA regulations for
damaging jobs and the economy. This past September, in Pennsylvania, he addressed a shale industry audience, stating Im
going to lift the restrictions on American energy and allow this
wealth to pour into our communities.
Candidate Trump specifically mentioned eliminating the
EPAs new source standards for power plants, the Clean Water
Act waters of the United States rule, and the Bureau of Land
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| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

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Managements Hydraulic Fracturing rule. Each of these rules is


bound-up in litigation at the moment. Candidate Trump also
said he would revoke policies that impose unwarranted restrictions on new drilling technologies, which may be an oblique
reference to new restrictions proposed on methane emissions
from oil and gas production.
EPA transition chief Myron Ebell is viewed as intelligent and
well-versed in EPA matters with a strong preference for a
free-market approach. Candidate Trump has said he opposes
unnecessary regulations of the energy industry and would
support a moratorium on regulations not yet operational. Such
a moratorium is not unusual when Presidential succession
occurs across party lines. That said, the length and applicability
of such moratoria can vary. An administration can have wide
discretion in interpreting statutes, provided that the necessary
notice and comment processes are followed under the Administrative Procedures Act. Organized and well-funded challenges
to these changes will be mounted in the court system. It is not
as simple as a stroke of the pen. And environmentalists have
already promised to wage a strong fight.
While it may be counterintuitive to some, simply reducing
the EPAs budget might not be the best approach to reaching
President-elect Trumps goal of deregulation. To rollback regulations requires significant regulatory resources and a reduction
in budget could make that a slower process. Likewise, reduced
resources can threaten an agencys ability to process the permits
and authorizations that industry needs to do business. The
next EPA Administrator may seek to reorganize the agency,
which often yields a prolonged period of reduced efficiency as
the organization reshapes itself.

While some see the recent Paris Climate


Agreement as a likely first target, that agreement
is not binding...It is questionable what actually
would be gained from withdrawing, especially when
weighed against the political capital President-elect
Trump would stand to lose internationally.
With a Republican Congress, bills that aim to do just that, like
the Federal Land Freedom Act, might have a chance.
President-elect Trump plans to open onshore and offshore
leasing on federal lands and waters. He also pledges an easier
permitting process and to retract Obama policies that he says
stalled such projects. Trumps transition website explains, We
will streamline the permitting process for all energy projects,
including the billions of dollars in projects held up by President
Obama, and rescind the job-destroying executive actions under
his administration.
CONCLUSION

If we learned anything from the 2016 election cycle, it is to


expect the unexpected, and that a Trump administrations
approach will be unconventional. While he is a political outsider,
at least in these early stages of transition, it appears President-elect Trump is seeking experienced professionals to be a
part of his administration, those that know energy, know the
environmental issues, and know how to manage. The regulations
that swept over the US domestic energy industry during the
Obama administration will subside, but how quickly and effectively depends on the sophistication of those Trump taps to
lead and the success of his opponents in using the judiciary to
slow things down.

ENERGY PROJECT DEVELOPMENT

A Trump administration is clearly in favor of enhanced exploration and production of oil and gas as a tenet of energy, economic and national security policy. Some of President-elect
Trumps key advisors from Oklahoma oil producer Harold
Hamm to North Dakota Congressman Kevin Cramer have
espoused a bullish posture on oil and gas and shale development
in particular. Candidate Trump has said he would approve
Keystone XLfor a share of the profits. TransCanada said it
remains fully committed to building the pipeline and is looking
at ways to engage a future Trump administration on the projects
benefits. The market sees potential here as shares of TransCanada rallied the Wednesday after the election in response to
Trumps win.
Between the Keystone XL pipeline and the Dakota Access
pipeline, the environmental left has spent the past four years
building up pipeline protests as ground-zero in the fight against
fossil fuels. In many cases, these fights pitted the Democrats
environmental and union bases against each other and may
have contributed to union defections to Republicans in the
2016 election. For this reason, expect President-elect Trumps
domestic policy team to quickly make it clear that they intend
to expedite approval of energy infrastructure such as pipelines.
DECEMBER 2016

1612ogfj_19 19

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

ABOUT THE AUTHORS

Jason Hutt (jason.hutt@bracewelllaw.com) is the


head of Bracewells Environmental Strategies
Group. He advises and defends clients in administrative, civil, and criminal enforcement actions
(and internal investigations) related to the federal
and state agencies, including EPA, DOI, DOE, CFPB,
and DOJ. He counsels energy companies, manufacturers, project
developers, investor groups, and financial institutions about
current and upcoming regulatory and policy developments at
the nexus of environment and energy policy.

Michael Weller (mike.weller@bracewelllaw.com)


advises clients in the context of government investigations and enforcement actions, regulatory
compliance and advocacy, litigation, permitting,
and in quantifying and allocating liabilities during
business transactions. He represents clients in the
energy sector, including upstream oil and gas companies and
pipelines, as well as industry trade associations, manufacturers,
importers, and financial institutions in a wide range of environmental law and business matters.
19

12/5/16 1:22 PM

Continental Resources
drilling in the Bakken.

Improved drilling, completion and breakeven price


NORTH AMERICAN SHALE WINS 2016
BIELENIS VILLANUEVA-TRIANA, RYSTAD ENERGY

WITH THE APPROACHING END OF 2016, a detailed analysis

of the North American shale industry this year shows improved


practices across drilling, completion, well performance, well
placing, and eventually well economics. All key metrics including drilling speed, proppant per stage, and EUR per well have
increased this year across the main shale oil plays, as shown
in figures one through three. Operators have improved well
performance every year for the last five years and such improvements are expected to continue with the activity focused
on the core areas of the main shale plays.
Drilling speed continued to increase in 2016 across all plays,
mainly due the deferral of rigs built before 2014 with the increased use of newer, more efficient rigs. On average, the drilling
speed has increased to nearly 800 feet per day across the US
shale plays. Higher drilling speed was also a result of increased
use of pad drilling, particularly in the Permian Delaware where
it reached nearly 60% in 2016. In mature plays such as the
20

1612ogfj_20 20

Bakken, the Eagle Ford and the Niobrara, pad drilling is already
above 90%. Differences in drilling speed among shale plays is
a result of different targeted depths, lateral lengths, and number
of wells per pad. Further drilling efficiency is expected in all
plays particularly in the Permian Basin.
All main shale oil plays have increased the average lateral
length of the wells in 2016, except for the Bakken. The play
shows an average lateral length of 9,400 feet, the same as last
year. The Niobrara has seen the largest increase in lateral length
per well during this year, mainly due to longer laterals drilled
by Anadarko Petroleum, Noble Energy, Bill Barrett, and PDC
Energy. Such longer lateral wells have included more proppant
use per stage, which gives an indication of bigger stages, hence
more reservoir contact that ultimately results in more oil recovered. This case is more prominent in Permian Delaware
wells, which have had a moderate increase in lateral length
but a significant increase in proppant use per stage in the last
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| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

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two years. Further increase in completion intensity is expected


particularly in the Permian Basin.
The increase in completion intensity observed in 2016 together with activity focused on the core areas of the plays (also
known as high-grading), led to higher recovery volumes per
well (Estimated Ultimate Recovery EUR) across all main
shale oil plays, particularly for the Eagle Ford and the Permian
Delaware. The latter has, on average, the largest EUR per well
across the main shale oil plays at nearly 1 billion boe. However,
Bakken wells still recover the most oil per well due to a high
oil content in the play. Further improvements in well perfor-

Rystad Energy has quantified the different factors


causing the 47% drop in shale breakeven prices and
found out that, on average, 30% of the drop is due
to lower unit costs and only 13% are attributable
to efficiency improvements. Hence, Rystad Energy
sees most of the recent cost reductions are highly
cyclical, so in a high-activity scenario, well costs
will quickly revert towards 2014 levels.

F1: DRILLING EFFICIENCY


Drilling speed

Rig age distribution

Eagle Ford
Bakken
Permian Midland

100

Permian Delaware
US average

2016

90

2015

80
70

1,200

Feet/day

2014

60
%

1,000

50

800

40

600

30

400

20

200

10

0
2014

2015

2016

2013
2012
2011 and older

J M M J S N
2014

J M M J S N
2015

J M M J S N
2016

Source: NASReport, NASWellCube

F2: COMPLETION EFFICIENCY


Average lateral length per well

10,000
9,000
8,000
Feet

600

Eagle Ford
Permian Delaware
US shale oil average

7,000
6,000
5,000

2011
2014
2016

500
Thousand lbs/stage

Bakken
Niobrara
Permian Midland

Proppant use per stage

+177%

400
300
200
100

4,000
3,000
2011

2012

2013

2014

2015

2016

Bakken

Eagle
Ford

Niobrara

Permian
Delaware

Permian
Midland

Source: NASWellCube
DECEMBER 2016

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21

12/5/16 1:22 PM

F3: WELL PERFORMANCE


Average EUR per well
1,200

100
Rich gas
Light oil

1,000

90
80
70

800

60
600

Thousand boe

Share of core drilling per play

50

Bakken
Niobrara
Permian Midland
Eagle Ford
Permian Delaware

40

400

30
20

200

10
0

13 14 15 16

13 14 15 16

13 14 15 16

13 14 15 16

13 14 15 16

Bakken

Eagle
Ford

Niobrara

Permian
Delaware

Permian
Midland

0
2012

2013

2014

2015

2016

Source: NASWellCube

F4: WELL ECONOMICS


Average breakeven price

Indexed breakeven by factors


84

Permian Midland

54

100%

Indexed
breakeven

37
64
Permian Delaware

2014
2015
2016

48
34
62

Niobrara

47%

High grading
effect

45
37

Efficiency
improvements

72
Eagle Ford

Unit cost
change

57
39

2014
60

Bakken

40
31

2016

-30%
-10%
-13%

USD/Boe
Source: Rystad Energy research and analysis, NASReport, NASWellCube

mance are expected among all shale plays since they all have
a considerable inventory of undeveloped locations in the core
area.
The combination of increased efficiencies, lower unit well
costs, and high-grading during the last two years has led to a
decrease in breakeven prices of 47% on average since 2014
among all shale plays, as shown in Figure 4. All main shale oil
plays reached a wellhead breakeven price below 40 USD/bbl
during 2016 with Bakken wells having the lowest wellhead
breakeven at 31 USD/bbl.
Rystad Energy has quantified the different factors causing
the 47% drop in shale breakeven prices and found out that, on
average, 30% of the drop is due to lower unit costs and only
13% are attributable to efficiency improvements. Hence, Rystad
22

1612ogfj_22 22

Energy sees most of the recent cost reductions are highly cyclical, so in a high-activity scenario, well costs will quickly
revert towards 2014 levels.
ABOUT THE AUTHOR

Bielenis Villanueva-Triana is a senior analyst at


Rystad Energy where she leads the North American
Shale team. Her main responsibility is the analysis
of upstream E&P shale activities in North America
with focus in the Permian Basin. Villanueva-Triana
is also responsible for analyzing global shale and
E&P activities in Mexico, Colombia, and Argentina. She holds
a Master of Science in Petroleum Engineering from the University of Oklahoma.
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DECEMBER 2016

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AN INTERVIEW WITH WPX ENERGYS RICHARD E. RICK MUNCRIEF

Three-basin strategy at WPX


REPOSITIONING THE PORTFOLIO REQUIRED CULTURAL CHANGES
WITHIN THE COMPANY AND BUY-IN BY EMPLOYEES
DON STOWERS, CHIEF EDITOR OGFJ

EDITORS NOTE: OGFJ recently visited with Rick Muncrief,


president and CEO of WPX Energy, in his offices in Tulsa, Okla.
to learn how he was able to reposition the E&P company to
survive the worst industry downturn since at least the 1980s and
surpass many of its peers. During the past two years, Muncrief
has sold non-core assets, acquired new assets, and built WPX
into one of the Top 20 US producers (see Nov. 2016 OGFJ) in
terms of total assets and market capitalization.

OIL & GAS FINANCIAL JOURNAL: Rick, its been more than
two years since you were named president and CEO of WPX
Energy, and a lot has happened during that time. WTI prices
were about $107 a barrel when you started in 2014. They collapsed to as low as $26, and now oil prices are back up to near
$50/bbl. Through it all, you had to remain focused on your
objectives. Tell our readers how you did it and what the early
days were like when you were repositioning WPXs portfolio
and changing the companys culture.
RICK MUNCRIEF: Well, it started even before I got here when I
was considering whether to take over this role or not. It was evident
that WPX produced a lot of products, but the company didnt
make a lot of money. Company margins on a per-unit basis were
bottom quartile. So I felt we had some real opportunities to change
that.
Fundamentally, the most important thing was to transition
the portfolio away from natural gas to crude oil. We needed more
of a balanced mix, and at the time we were just 10% oil. So we
really needed to change that. Another thing I noticed, once I got
here, was that some of the assets were really burdened by some
long-term legacy contracts. We also had some assets in South
America and in some very, very marginal areas. So I felt we could
do some things that would change our assets and our product
mix for the better. We wanted to simplify the story and go from
seven or eight large assets to three. So we finalized our strategy
in the fall of 2014, just before the commodity price dropped
dramatically.
OGFJ: How did WPX get into this predicament?
MUNCRIEF: Well, the first thing is that there wasnt a strategy,
and thats always a problem. If you dont know exactly where youre
headed, all roads will get you there. So we worked very closely
with the board to set a strategy to create a balanced portfolio with
a preference for crude oil.
24

1612ogfj_24 24

OGFJ: In the first quarter of 2015, WPX was still mainly a natural
gas company with 70% of its assets weighted toward gas. A year
later in 1Q16, 62% of your assets were oil. How did you accomplish this in such a short time?
MUNCRIEF: The strategy that we laid out in the fall of 2014 told
us which assets we needed to remove from our portfolio, and we
went to work on that immediately. We started having some early
successes when crude oil prices dropped in late 2014 and early
2015, so that showed we had an opportunity to buy assets, but we
didnt know how long that window would be open. We didnt have
a crisis mentality. We were methodical because we were very well
hedged, which certainly helped as we went into the downturn.
We knew we needed to build inventory when the opportunity
presented itself. We started to look at the existing basins we were
in the Bakken and the San Juan but there were very limited
opportunities for the kind of assets we wanted. We also looked at
places like the Powder River Basin and the DJ Basin and the Eagle
Ford, and you always know that you want to be in the core. In
most cases, the core was pretty well taken. The Permian, on the
other hand, was at a point in its development cycle that presented
some opportunities. However, the Midland Basin looked like it
was fairly locked up and also pricey. But the Delaware Basin was
very intriguing to us. We decided this was definitely a basin we
wanted to be in. We looked at the geology and decided where we
would really prefer to be. Thats what led us to the central part of
the basin.
OGFJ: Tell us about the RKI acquisition.
MUNCRIEF: We closed the purchase of privately held RKI Exploration & Production in August 2015. In doing so, WPX gained a
substantial presence in the core of the Permians Delaware Basin
that included about 22,000 boe/d of existing production more
than half of which was oil; approximately 92,000 net acres about
98% of which is held by production; more than 5,500 gross risked
drilling locations across stacked pay intervals; and more than 375
miles of scalable gas gathering and water infrastructure.
This was a defining moment for our company. The Permian is
characterized by numerous stacked pay reservoirs, has an extensive
production history, long-lived reserves, and high drilling success
rates. The 92,000 acres represented more than 670,000 prospective
net effective acres of stacked pay. The 9,000-foot hydrocarbon-charged stratigraphic column includes the Wolfcamp, Bone
Spring, Avalon, and Delaware Sands intervals.
That transaction helped drive our high-margin oil growth,
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| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

AN INTERVIEW WITH WPX ENERGYS RICHARD E. RICK MUNCRIEF

Photo by
Evan Taylor
Photography

DECEMBER 2016

1612ogfj_25 25

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

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12/5/16 1:22 PM

AN INTERVIEW WITH WPX ENERGYS RICHARD E. RICK MUNCRIEF

accelerated our portfolio transition to more liquids, and solidified


our premier position in the western United States. These areas
enjoy significant advantages of established infrastructure, which
provides the opportunity for stronger realized commodity
prices.
Our leadership team has previous experience in the Permian
Basin and a track record of maximizing large-scale oil developments to increase production, reserves, and enterprise value while
lowering expenses. Including some bolt-on deals since closing the
RKI transaction, WPX now has 102,000 net acres in the basin.

OGFJ: What was your next move?

MUNCRIEF: Once we knocked down the RKI acquisition, we had


to delever because crude oil prices took another dip. Then we
were on the clock. The first time we did our asset sales, we were
on our internal clock and we were proceeding very judiciously.
Now we were on the clock to make sure we could reduce debt
quickly. And the team did a tremendous job. I think the results
speak for themselves.
OGFJ: Transitioning a company-wide portfolio as you did
often requires a change of culture within the company. Success requires a buy-in from
everyone in the organization.
How did you go about generating buy-in, and was there initial
resistance in some quarters?
MUNCRIEF: Yes, there was
some, but resistance comes in a lot of different ways. We were
fortunate to have a lot of really, really dedicated people here who
never really had a chance to experience true success. Ever since
WPX was spun off from Williams, they had never experienced the
success they had hoped for. And, quite honestly, even within
Williams they had been challenged. So the desire was there, but
what was lacking was the confidence. We did see some resistance
from various folks, and a lot of those people arent here now. Others
were coached into being thoughtful and proactive and are on
board with our strategy.

OGFJ: Did you bring in new people to the organization?


MUNCRIEF: We brought in some fresh blood here, but it was not
much. It was more around technical and operational leadership.
We had to get people in the right roles and put more emphasis
on operations and technological advancement. That was my
background, but I needed some help.

OGFJ: What is your background?


26

1612ogfj_26 26

MUNCRIEF: I graduated from Oklahoma State University with a


degree in petroleum engineering technology in 1980. I started as
a field drilling engineer in the Anadarko Basin. We were drilling
deep, high-pressure vertical wells in those days. After a couple of
years, our company (El Paso Exploration) was bought out by
Burlington Resources. I was transferred from Amarillo, Texas, to
Billings, Montana, in 1984. We operated all over the US, but the
highlight of the Billings years was when the team we were on
drilled the first horizontal Bakken well in 1987. I believe that was
the second true horizontal well in the US. Burlington Resources
and its predecessor companies were known for their technical
abilities, especially in horizontal drilling and coal-bed methane
production. Many of those plays in North Dakota and eastern
Montana were developed by Burlington and by Continental Resources. We closed our Billings office and I moved to Denver for
five years. I did a lot of A&D work and business development. After
that, I ran production operations in Farmington, New Mexico, in
the San Juan Basin. We had drilling, completions, production,
plants, and pipelines a little of
everything there. In 2005, we
Photo by
Evan Taylor
were bought out by ConocoPhilPhotography
lips, and I stayed with them for
two years. Then I left and moved
back to my home state of Oklahoma. Ultimately, I got a call
from Harold Hamm with Continental Resources and joined
them in 2009. I spent five really
wonderful years with them. They
had a great team and those were
huge growth years for Continental. When I got the call about
assuming this job, I liked the
challenge of doing a turnaround a true transformation at WPX,
so I accepted the job. Weve changed everything except our name,
but our new identity couldnt be more clear. Its been very challenging, but very rewarding, too.
OGFJ: Before the transition, where were your assets?
MUNCRIEF: They were all over. We had them in the Piceance,
the Bakken, the San Juan, the Marcellus, and we had coal-bed
methane in the Power River Basin. We also had assets in South
America. We had operated and non-operated assets, and we also
had some firm transportation obligations, some of which were
out of the money. So we had to clean all this up in order to move
forward. Our team has done a phenomenal job, and there is nothing
like success to overcome resistance. So fast-forward to today. We
have a top-notch team that is competent; were humble, too
because its a humbling world and a humbling business. We know
where were headed we have a strategy. The RKI acquisition
allowed us to adjust our multi-basin strategy into a new three-basin
strategy. We basically traded the Piceance Basin for the Permian,
and thats a nice trade.
WWW.OGFJ.COM

| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

AN INTERVIEW WITH WPX ENERGYS RICHARD E. RICK MUNCRIEF

We closed the purchase of RKI Exploration & Production in August 2015. In


doing so, WPX gained a substantial presence in the core of the Permians
Delaware Basin that included about 22,000 boe/d of existing production more
than half of which was oil; approximately 92,000 net acres about 98% of which
is held by production; more than 5,500 gross risked drilling locations across
stacked pay intervals; and more than 375 miles of scalable gas gathering and
water infrastructure. This was a defining moment for our company.

San Juan Basin


Photo by Jim Bletcha/Courtesy of WPX

OGFJ: Can you elaborate a little about what drew you to the
Permian Basin? What did you see that made the RKI acquisition
such a game-changer for WPX?
MUNCRIEF: There were three things. Number one was the resource. The amount of resources in the Permian is just incredible.
Number two was the business climate. Texas and New Mexico,
where the RKI assets were, both have a favorable business climate
for companies. The third thing was the infrastructure. There was
already a good start with existing infrastructure because the
Permian has been producing for about 100 years. I spent a large
part of my childhood and early years in that part of the country.
I recall riding up and down lease roads with my dad, and here we
are 50 years later driving on these same roads. When I look at the
depth of the inventory there and the technology were deploying,
I can see my grandkids 50 years from now engaged in the same
business. A couple of generations from now, there will still be a
lot of work to do in that basin.
OGFJ: Doesnt WPX have some gas assets in the Permian as
well?
MUNCRIEF: Yes, we have some associated gas produced there.
There is a strong market for it just across the border in Mexico.
Our exports to Mexico continue to grow. We also have strong
markets for natural gas in Arizona, Nevada, and California all
over the Southwest. When the LNG market fully develops, we
have great access to the Gulf Coast. Global demand for oil products
DECEMBER 2016

1612ogfj_27 27

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

and natural gas will continue to expand with emerging markets


in India and China because those folks want what we have. We
need to get American crude oil and natural gas to those growing
markets, so it was very important for us to lift the ban on crude
oil exports.
OGFJ: As we discussed, earlier this year WPX exited the
Piceance, previously a prized natural gas asset. Do you think
you received a fair price for the asset during the downturn, and
was it a difficult divestiture for the company?

MUNCRIEF: It was a challenging divestiture because we needed


to move quickly on it. Natural gas prices softened up somewhat
during that process. But our team did an extraordinary job and
worked tirelessly in getting that deal across the line. There was a
lot of competition, and we got a very solid price for the assets. I
think most analysts will tell you the same thing. I think the company that bought it will find that the assets will work out fine for
them. They seem very pleased with the deal as well. The Piceance
is a very nice basin and we had a lot of inventory there, but for us
the Permian was a good trade. To answer your question, we were
very pleased with the price we received, what it did to our balance
sheet, and what it did for our focus. It also allowed us to do a lot
of other things related to our cost structure.
OGFJ: In October 2014, WPX rolled out its five-year strategy
to increase oil volumes five-fold, which would have been a
target of about 81,000 bbl/d by 2020. Later, however, you men27

12/5/16 1:22 PM

AN INTERVIEW WITH WPX ENERGYS RICHARD E. RICK MUNCRIEF

OGFJ: How should we look at the WPX portfolio as we prepare


to enter a new year? How will you allocate capital across the
portfolio?

MUNCRIEF: At least half of our capital will go to the Permian


Basin. The other two basins will get the remainder. Well have a
couple of rigs working in the Bakken, and then one out in San
Juan. So it will be about 50% to the Permian, 30% to the Bakken,
and 20% to the San Juan. Well see growth in all three basins. We
still have some dry gas in our portfolio, but well focus on oil.

OGFJ: In your view, how is WPX perceived by analysts? And


what, if anything, do you think investors might be missing
when it comes to the WPX story?

Permian Basin
Photo by Jim Bletcha/Courtesy of WPX

tioned a goal of 100,000 bbl/d, which exceeds the previous


target. Why did you increase the goal?
MUNCRIEF: When we added the Permian assets, that was a
fundamental shift in our portfolio that allowed us to restate our
production goals. While the 100,000-bbl figure is a milestone, it is
not the principal thing that is driving us. That will be the outcome
of some really nice assets we have now in the Permian, the Bakken,
and the San Juan. Deploying our capital and our cash from this
production will drive great returns for our stakeholders. That
production growth will also allow us to further delever and get
our balance sheet even stronger over time, which is really
exciting.

OGFJ: Are you assuming well be living in a $50/bbl world?


MUNCRIEF: Yes. We laid all this out on our recent earnings call.
If something changes, well simply do whats necessary and stay
true to our disciplined approach. Our goals are aggressive, but well
temper that with being prudent and flexible. The new strategy will
have us at 60% crude oil. Add NGLs on top of that, and were going
to be 80% liquids. Over time, probably two to four years, the NGL
markets will start coming back, and that will put us in a good spot.
28

1612ogfj_28 28

MUNCRIEF: I think were perceived in pretty favorable terms. We


have a number of buy ratings and market outperform ratings
from analysts. You always have a few detractors, but overall weve
been well received and the equity has performed very well this
year. Our bonds have strengthened dramatically. In some cases,
we may be a wait and see, but we understand that. Its a show-me
world, and were ready to do just that. I would urge investors to
think about how we can grow this company over the next five
years. They should look at what this team has accomplished over
the past two and a half years in a really tough market and also
look at the quality of our assets and where they are located. This
will really have a favorable impact on our balance sheet. We have
the potential to really set ourselves apart from our peer group. Its
hard not to get excited about our story. I certainly am.
OGFJ: If something were to happen and oil prices drop again
as they did in late 2014, is WPX built to withstand this kind of
blow?
MUNCRIEF: Were not as over-levered, and that certainly makes
a big difference. As of a few weeks ago, were nearly 70% hedged
at $51 for 2017. And were about 25% hedged at $57 in 2018. So I
think weve done a pretty good job at protecting the downside
and leaving some upside in 2017 and 2018. If crude goes to $60,
that will set us up nicely in 2018 and 2019. If we were convinced
that crude would trade in the low to mid $40s for an extended
period of time, we probably would slow down our growth. But
right now, were ready to deploy our cash on hand and put it to
work. We have a stack of very nice development opportunities,
but were prepared to slow down if the market demands it.
OGFJ: Oil is a global commodity, of course, so OPEC decisions
have a lot to do with oil prices. North American shale producers
seem to be the new swing players. Is this good or bad for the
industry?

MUNCRIEF: I think the best thing for the industry would be a


stabilized oil price between $50 and $60 for the next 12 months.
Lets get some of our service companies and vendors healthier. At
WWW.OGFJ.COM

| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

AN INTERVIEW WITH WPX ENERGYS RICHARD E. RICK MUNCRIEF

Williston Basin
Photo by Jim Bletcha/Courtesy of WPX

$60, thats when you start seeing real growth again. There has not
been a lot of capital going into international projects lately. The
number of rigs operating outside North America is way down.
Eventually, that will have an impact. Thats why it was so important
for the crude oil export ban to be lifted. One day we will have a
call on US shale, and we need to be prepared.

OGFJ: If that happens, how quickly can US suppliers ramp up


production for export?
MUNCRIEF: That will be determined by the commodity price. It
depends on what that profile looks like. Some basins, like the
Permian, will be able to ramp up production more quickly than
others.
OGFJ: Did we lose a lot of people during this downturn that
will be hard to replace? Would that hinder a fast ramp-up
scenario?
MUNCRIEF: Unfortunately, yes. Coming into the recent downturn,
a lot of E&P companies were running leaner than they had been,
say in the mid-1980s, or a couple of times in the 90s. Its not a
question of inventory. With resource plays, you know you have
inventory. Its just a matter of how quickly you can recover it, and
you need people in order to do that. Thats on the producer side.
On the service company side, its been very tough. So weve been
focused on retaining a healthy relationship with them. They have
helped us achieve incredible efficiencies in recent years. We now
DECEMBER 2016

1612ogfj_29 29

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

know exactly which bits work


the best, which downhole motors work the best, and which
stimulation techniques work
the best. And thats a great
thing for investors. I consider
myself an investor, and Ive
gone out and bought a lot of
our stock in the open market.
I really believe in this team and
what were doing.

Clay Gaspar,
Kevin Vann,
Chief Operating Chief Financial
Officer, WPX
Officer, WPX
Photos by Jim Bletcha/Courtesy
of WPX

OGFJ: Is there anything youd like to add that we havent covered here today?
MUNCRIEF: Just that our overall game plan is solid. We have a
session with our board every year in which we just talk about our
strategy. Weve done that for two years now. We like to get perspective from the investment community, so both years weve brought
in an existing shareholder to talk to our board about why they own
WPX. We also have brought in targeted shareholders someone
who has not yet pushed the buy button. I want our board to hear
why they havent bought in and to see if there are some common
denominators that will help improve our strategy going forward.
We have a very strong board, and this has been very well received
by board members and from the investment community as well.
OGFJ: Thanks very much for your time today, Rick.
29

12/5/16 1:22 PM

Still they ride


US NORTHEAST NATURAL GAS PRODUCERS GEAR UP FOR WINTER, TAKEAWAY EXPANSIONS
SHEETAL NASTA, RBN ENERGY

Editors Note: This article first appeared in November as part


of RBN Energys Daily Blog and is being distributed to OGFJ
readers with permission.

NORTHEAST PRODUCTION GROWTH, the primary driver of

overall gains in US natural gas output in recent years, has largely


stalled in 2016. Rig counts in the Marcellus/Utica dropped to near
six-year lows, and the region has been facing constraintsfrom
takeaway capacity and in the past month or two from storage
injection capacity. But market factors are again about to roil the
Northeast: 1) winter heating demand is on its way, and 2) more
takeaway capacity has come online in the past month and still
more is coming before the year is up. Here, we review recent
Northeast natural gas production trends using pipeline flow data
from Genscape and assess factors that will impact regional production this winter.
Since 2010, by far the most significant growth in US natural
gas production has occurred in the Northeast, where the Marcellus/
Utica shale plays in Pennsylvania, West Virginia and Ohio have
proven to be among the most productive in the world. To put that
into perspective, while production from the rest of the US has
declined by nearly 7 Bcf/d over the last five years, Northeast production has climbed at an astounding pace, from less than 5 Bcf/d
in 2011 to a record 22.8 Bcf/d in February 2016. Since February,
volumes have bounced around but overall growth has flattened.
With winter now just around the corner and pipeline expansions
coming online, its time to revisit whats happened with Northeast
production this year and consider the prospects for supply growth
in the coming months.
At RBN, one way we track Northeast production is using daily
natural gas pipeline flow data from our friends atGenscape. Pipeline
flow data is a collection of daily gas volumes nominated by market
participants to either be received from or delivered into natural
gas interstate pipelines (pipes that cross state lines) atthousands
of individual meters across the US. Aggregated by facility type,
these flows provide critical insights into supply and demand trends
on a nearly realtime (daily) basis. For this analysis specifically, we
used Genscapes NatGas Analyst tool to query for pipeline flows
from production receipt meters (i.e., gathering systems, processing
plants) located in the three Northeast states where the majority
of activity and supply growth has been in recent years: Pennsylvania,
West Virginia and Ohio. Figure 1 shows the resulting daily volumes
for total production receipts from the three states combined by
year since 2009 (when the Shale Revolution hit the Northeast).
As Figure 1 shows, supply growth in the Marcellus/Utica continued well after oil and natural gas liquids (NGL) prices and rig
30

1612ogfj_30 30

counts dived (starting in mid-2014). In early 2012 there were as


many as 158 rigs operating in Pennsylvania, West Virginia and
Ohio combined. That was down to about 130 rigs two years ago,
and down further to fewer than 40 rigs this summer. Nevertheless,
producers managed to keep volumes growing through 2015 (blue
line) and early 2016 (black line) despite limited new drilling activity.
They did this by shifting their focus to higher-yield wells in sweet
spots, increasing efficiencies and utilizing their inventory of
drilled-and-uncompleted wells, or DUCs. These strategies, along
with the addition of incremental pipeline takeaway capacity, allowed them to increase their productivity per rig and to lower the
price at which production is still economical.But by spring 2016,
the momentum ran out. In fact, 2016 marks the first year since
2009 that Northeast production will have declined over the course
of the year. To be clear, output is still on average about 2.5 Bcf/d
higher than last year for the full year to date. But growth slowed
to a crawl in late 2015 and pretty well stalled after peaking in
February 2016. In addition to the drilling slowdown, there were
multiple market events that disrupted production receipts since
February (see dips along the black 2016 line in late June/early July,
late July and again in September/Octobermore on those events
in a bit.) The bottom line is that as of October (2016), production
was averaging 0.2 Bcf/d lower than where it started the year and
a whopping 1.4 Bcf/d lower than the peak seen in February. In
contrast, production grew 1.2 Bcf/d between January and October
last year, and in the two years prior to that, Northeast production
rose nearly 3.0 Bcf/d in that same nine-month period.
Heres a look at the same data by producing sub-regions, shown
clockwise from the top left in Figure 2: northeastern Pennsylvania
(NE PA), southwestern Pennsylvania (SW PA), West Virginia (WV)
and Ohio (OH). We split Pennsylvania into two areas defined by
counties because those two producing regions are so radically
different, with NE PA producing primarily dry gas and having
greater takeaway constraints, and SW PA being primarily wet gas
with some dry and only somewhat constrained. The graphs show
the 2014 (green line), 2015 (blue line) and 2016 (black line) daily
production volumes, as well as the December 2015 average (red
line). Also note the volume scale on the left axis varies by
region.
NE PAproduction (Figure 2 - top left graph) continues to be
the biggest producing area in the region, but production from this
region peaked in late 2014 (spike in the green line) at just above
8.0 Bcf/d and has struggled since then. In late 2014, production
rose as takeaway expansions came online and exceptionally cold
weather propelled demand and prices higher in the region. (You
can see similar upticks in each of the other regions around this
time.) But volumes retreated again as weather normalized by late
December 2014/early January 2015, and dived further by April
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| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

DECEMBER 2016

1612ogfj_31 31

takeaway capacity from the producing regions. Up until now, production growth has
been paced by takeaway capacity additions. In recent years, theres been a now familiar
patterntakeaway constraints followed by incremental takeaway capacity out of the
Northeast supply regions, which then are immediately followed by a surge in Marcellus/
Utica production and the need for more takeaway capacity, and so on. The impact of
constraints on production worsened after production surpassed demand through 2015
and the region became progressively more dependent on takeaway capacity out of the
region, including through the exceptionally mild winter of 2015-16. Between February
and October (2016), not only was there little expansion capacity added, but existing
takeaway capacity experienced some significant disruptions, which only contributed to
the supply volatility and declines. In early March, REX experienced a brief outage following
a mechanical issue at one of its receipt meters in Ohio, reducing overall Northeast production by 0.8 Bcf/d for a few days. This scenario recurred on a larger scale in mid-July
when REX began a planned maintenance to complete tie-in work related to its Zone 3
Capacity Enhancement expansion project. The week-long outage again reduced producF1: PA, OH, WV DRY GAS PRODUCTION

Bcf/d

25
20

2016
2015
2014

15

2013

10

2012
2011

2010
2009

1J
18 an
-J
a
4- n
F
21 eb
-F
9- eb
M
26 ar
-M
12 ar
-A
29 pr
16 Ap
-M r
a
2- y
J
19 un
-J
u
6- n
Ju
23 l
-J
9- ul
Au
26 g
-A
12 ug
-S
29 ep
-S
16 ep
-O
2- ct
N
19 ov
-N
6- ov
D
23 ec
-D
ec

Source: Genscape

NE PA

6.0
Bcf/d

5.0
4.0
3.0
2.0

WV

Bcf/d

3.5
2.5

Ja
n
Fe
Mb
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
N ct
o
Dv
ec

1.5

2014

2015

5.0
4.0
3.0
2.0
1.0
0

OH

Ja
n
Fe
Mb
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
c
N t
o
Dv
ec

4.5

SW PA

Ja
n
Fe
b
M
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
N ct
o
Dv
ec

8.5
8.0
7.5
7.0
6.5
6.0

Ja
n
Fe
Mb
a
Apr
M r
ay
Ju
Jun
Au l
g
Se
p
O
c
N t
o
Dv
ec

Bcf/d

F2: PA, OH, WV DRY GAS PRODUCTION BY SUB-REGIONS

Bcf/d

2015 once winter demand subsided altogether. For full 2015, regional production
averaged 7.0 Bcf/d, down 0.3 Bcf/d from
2014, and has averaged barely higher than
thatabout 7.2 Bcf/din 2016 to date,
which is just 0.2 Bcf/d higher than the
December 2015 average.
SW PA (Figure 2 - top right graph) has
been somewhat more resilient, climbing
through 2014 and 2015, but this area too
has flattened out in 2016. The region peaked in late 2015 at just over 5.0 Bcf/d and
averaged 4.4 Bcf/d in 2015 (1.4 Bcf/d higher
than 2014). This year to date, its averaged
5.4 Bcf/d, 1.0 Bcf/d higher year on year but
again barely (just 0.3 Bcf/d) higher than
where it ended 2015.
WV (Figure 2 - bottom left graph)also
grew somewhat in 2015, up about 0.5 Bcf/d
to an average 3.5 Bcf/d. Regional production lingered more or less near 2015 levels
untila major disruption in mid-2016 (deep
valley in the black line) when severe flooding shut-in receipts, particularly onto Columbia Gas Transmission. Volumes recovered in short order and reached annual
highs in late summer 2016. But growth has
slowed since then and receipts are about
0.1 Bcf/d higher year on year through October, bringing the year-to-date average to
3.7 Bcf/d.
OH (Figure 2 - bottom right graph),
which primarily represents Utica Shale
production, has been the biggest driver of
Appalachia production growth in the past
couple of years, climbing from almost nothing in 2013 to 3.5 Bcf/d this year to date,
nearly level with West Virginia. That is up
1.3 Bcf/d year on year for the period, but
up just 0.2 Bcf/d from the December 2015
average. Volumes were in part thwarted
by capacity disruptions on Rockies Express
Pipeline (REX), particularly in July (more
on that below).
Several factors created additional headwinds for producers this year that exacerbated the slowdown compared to 2015.
For one, producers continued to lay down
rigs, particularly in Pennsylvania. Rig
counts started 2016 near 50 but were down
in the mid-30s by May and lingered there
through much of the summer. For another,
even if rig counts hadnt fallen, there was
the ongoing issue of constrained pipeline

Dec-15 Avg

2016

Source: Genscape

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

31

12/5/16 1:22 PM

tion by more than 1.0 Bcf/d. And in between those two events
was a surprise outage on Texas Eastern Transmissions (TETCO)
Penn-Jersey line in late April, when a rupture and explosion severed
flows through the lines Delmont compressor station in Westmoreland County, PA. The line flows primarily Marcellus production
receipts eastbound to the New Jersey market area. While the
majority of flows on the line were rerouted, the outage shut in
200-300 MMcf/d of Marcellus production in the area for an extended period. And, as mentioned previously, flooding in West
Virginia temporarily curtailed production from that state as well
in late June/early July.
More recently in late September/early October, the region
experienced another kind of constraint nearly full storage. For
a while there in late summer, it looked as if gas market economics
had wiped out the year-on-year surplus in storagelow gas prices
had incentivized the market to burn record amounts of gas for
power generation, the year-on-year storage surplus had come
down from about 1 trillion cubic feet (Tcf), and it looked like the
US storage inventory was going to narrowly escape last years
record high levels. But Mother Nature had something else in mind.
Weather forecasts for above-normal temperatures, which had
supported demand in the hotter months, lingered well into October,
when some demand for heating normally kicks in, particularly in
the northernmost states. That hit the Northeast supply regions
especially hard. Inventories at regional storage facilities marched
toward capacity limits, backing up supply in the pipelines and
ultimately back to the wellhead. After hitting an average 22 Bcf/d
in August, Northeast production by October 2 had dropped to a
2016 low near 20 Bcf/d. Despite falling production Northeast
natural gas spot prices for next-day delivery traded as low as $0.10/
MMBtu around that time, according to Natural Gas Intelligences
daily cash price index. A lot of the recent production declines in
the Marcellus/Utica have been related to short-term capacity
issuesstorage and pipelineexacerbated by mild weather. The
resulting supply congestion may continue to some extent in the
near-term, especially if mild weather persists, given that this is
also around when scheduled, mandatory withdrawals (i.e. ratchets)
kick in for some big Northeast storage facilities for the sake of
operational integrity, regardless of demand. But many of the capacity issues are likely to fade when winter hits and as more
pipeline-expansion projects come online.
Already since that low point in October, daily flows show
Northeast production volumes have bounced back somewhat to
near 22 Bcf/d as of early November as some heating demand has
shown up. (Heating degree days, or HDDs, in late October climbed
to above 100 in the Northeast region for the first time since midAprilabove-normal for this time of year.) Moreover, there are
other signs as well that Northeast producers potentially are gearing
up for another winter production surge. Rig counts in the three
growth states (Pennsylvania, Ohio and West Virginia) have creeped
back up since August and are above 50 combined as of the last
two weeks, according to the latest Baker Hughes rig count data,
which is in line with January 2016 counts. There are also several
expansion projects that have come online this fall or that are
32

1612ogfj_32 32

planned to begin service in the first half of winter, facilitating


increased production volumes in the process. Phase 1 of TETCOs
Gulf Markets Expansion began service in early October, increasing
southbound takeaway from Ohio and Pennsylvania by about 0.4
Bcf/d. Around the same time, EQT Midstream Partners LP (EQM)
ramped up its new Ohio Valley Connector (OVC) pipeline, which
is designed to move as much as 0.85 Bcf/d of production from
northwestern West Virginia to interconnect with REX and TETCO
in Ohio (0.65 Bcf/d of that is subscribed on a firm transportation
basis). Of course, this incremental capacity came on just as tepid
demand and high storage levels were beating back production.
And for now, any OVC flows onto REX would have to come at the
expense of receipts from other meters, as the REX mainlines
westbound capacity has been running full. But in December, REX
is expected to bump up its westbound capacity by another 0.8
Bcf/d, on top of the existing 1.8 Bcf/d. In addition, Dominion
Transmission Inc. (DTI) received the green light to place its Clarington and Lebanon West II projects into service as of November
1, which would move an incremental 250 MMcf/d from West
Virginia and 130 MMcf/d from Pennsylvania, respectively, to interconnects in Monroe County, OH. Also in late October, the
Federal Energy Regulatory Commission (FERC) approved the
November 1 (2016) start-up of most of Spectra Energys 342-MMcf/d
Algonquin Incremental Market (AIM) projectthe largest expansion of New England pipeline capacity in several years. The balance
of the project is expected to go online sometime in December.
These expansions, along with the other market dynamics, indicate uncertainty or potential volatility in the Northeast market
in the coming months. While the expansions and onset of winter
demand are likely to incentivize production, weather remains a
wild card (as always). Even a normal winter would be bullish
compared to last years exceptionally mild winter, prompting
producers to turn on the spigot. On the other hand, prolonged
mild weather and delayed heating demand could increase supply
congestion and suppress production. Well be watching flow data
closely to see how these opposing factors play out this winter.

ABOUT THE AUTHOR

Sheetal Nasta is a fundamental energy analyst, writer


and consultant with over 10 years of experience
observing and analyzing natural gas markets. She
was previously Manager of Energy Analysis for North
American Natural Gas at Bentek Energy for five years,
where she developed and shepherded new market
analysis and content for more than a half-dozen white papers,
Benteks Market Call forecast reports, the Regional Observer suite
of products and other reports. Prior to Bentek, she was Senior
Editor at Platts on the natural gas desk, where she produced the
daily Platts/ICE Forward Curve and specialized in telling data-driven investigative and analytical stories explaining the impacts of
infrastructure expansions, supply and demand fundamentals and
other factors in the natural gas spot and forward markets.
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| OIL & GAS FINANCIAL JOURNAL

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12/5/16 1:22 PM

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Oilfield services consolidation


NAVIGATING THE ROUGH WATERS OF SECTOR TRANSFORMATION
DOUG MEIER, MILE MILISAVLJEVIC, GREGG BYERS, KYLE WEST, PWC, HOUSTON

still reeling from a severe industry downturn which began in mid-2014. With a
significant crude price decline, M&A
activity slowed substantially from the
historically high levels of late 2013 and
the first half of 2014. Adjusting to the
lower-for-longer environment, oilfield
services companies have been stabilizing their balance sheets and right-sizing
cost structure. The sector landscape has
been changing, with signs of readiness
for corporate transaction activity. Energy executives are looking to deals as
a means to achieve scale, fill in portfolios or enhance capabilities. Their strategic options depend on the companys
liquidity, asset strength, and access to
capital markets. Though a wide bid-ask
spread, among other factors, hampered
getting deals done, the market is starting
to stabilize. Now, strategic buyers have
a leg up given their ability to justify higher premiums through synergies and offer
stock as a tax-advantaged transaction
currency.
MARKET SITUATION

The oil and gas (O&G) industry is renowned for its boom and bust cycles,
creating fortunes and wiping them away
equally as fast. The current downturn
feels particularly sharp as Brent crude
dropped 75% from $106/bbl in July 2014
to $26/bbl in January 2016. While prices
have recovered modestly (currently trading at around $51/bbl as this article goes
to print), market conditions remain
challenging as the low prices weigh on
sector performance. Demand for oilfield
services is weak in many parts of the
world, with a few exceptions of sustained areas of strength, namely the US
Permian basin and the Middle East.
Looking forward to the balance of
2016 and into 2017, the O&G market
recovery remains anything but certain.
34

1612ogfj_34 34

Nightman1965 | Dreamstime.com

THE OILFIELD SERVICE INDUSTRY is

Determination of OPEC suppliers to battle for market share, and resilience of North
American tight oil producers is yet to yield a victor. OPEC spare capacity is low and
capital is increasingly constrained as major producing countries continue running
high fiscal deficits. At the same time, distress is also taking its toll on North American producers, resulting in US domestic production drops of ~750K bpd in first
nine months of 2016. Global demand, while relatively strong in the past year, is
facing pressures in forms of slowing economic growth and fragile financial
systems.
Natural production declines will likely result in a ~20 MMBOE supply gap by
2020. Most of the capital is expected to flow to OPEC, Russia and China, with the
balance going to shale and pre-funded deepwater, based on relative play economics.
The capital efficiency battle is expected to occur between shale and deepwater over
time, and will likely lead to a need for higher levels of industry collaboration and
integration.
The resounding theme across companies in the service space is a relentless focus
on preserving cash flow by undertaking significant operating and capital cost reductions, and fighting to maintain market share. This unique time in the industry
presents opportunities for the healthier companies to pursue strategic acquisitions
or partnerships as, despite the uncertainty, these companies can re-focus their
capability-aligned value proposition by engaging in corporate transaction
activity.
SECTOR TRANSFORMATION UNDER WAY

Service companies who previously focused on speed and effectiveness, must now
compete to lower their customers cost per barrel. Significant cost reduction and
efficiency gains resulted in drilling costs and rig count declining to a nearly 10-year
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| OIL & GAS FINANCIAL JOURNAL

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DECEMBER 2016

1612ogfj_35 35

F1: US DRILLING ACTIVITY


400

Footage drilled (MMft)


Drilling cost ($MMft)

390
380

$375

350

$381

$380

$373

370

300
$362 $362

360

250

$352

350

200

$342

340

150

$335 $333

$328

330

100

320

Footage drilled (MMft)

400

Drilling cost ($/MMft)

low, as shown in Figure 1. The decline


in the rig count is attributed to improved efficiency combined with lower
overall drilling activity. At the current
E&P capital spend level, the oilfield services sector cost structure may not be
sustainable.
Adjusting to the lower-for-longer
environment and preparing for an uneven recovery ahead, the industry has
started to transform. Oilfield service executives are rethinking their competitive
position and service model in light of
their customers acute focus on cost and
efficiency gains. Furthermore, recent
fragmented growth across oilfield services sub-sectors has left them primed
for consolidation. Prior to the downturn,
the market attracted many new entrants
and top players lost market share to
smaller competitors since the last market
peak of 2008 (depicted in Figure 2). Although there are areas within the oilfield
services sector with high barriers to entry
that are still fairly concentrated, there is
still significant price competition because
the marginal supply is not provided by
the top players.
Though some companies are in a better position to weather the downturn,
the number of bankruptcy filings in oilfield services has grown to over 60 in just
the first nine months of 2016 compared
to 39 in all of 2015. However, many sellers
appear hesitant to sell despite financial
difficulties. The competitive intensity of
the currently oversupplied market is testing all service providers from smaller
players with weak financials to larger
diversified companies who continue innovating to justify their premium position. So, who is in the lead from a returns
standpoint?
From 2012-2015, the market favored
global category leaders over the integrated players as evidenced by a difference in total shareholder returns of 11%
as shown in Table 1. Mid-tier companies
with weaker technical capabilities had
the lowest returns, -13% on average.
Without clear differentiation, they may
be challenged to capture customers
demand and generate margins in todays
market.

50

310
300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q316
TYD

Source: Spears & Associates

F2: SECTOR MARKET SHARE BY REVENUE


Revenue
CAGR

Top player

11%
12%
9%
6%

19%
17%
10%

20%
18%

33%
16%

50%

11%

31%

11%
7%

24%

25%

11%

16%

17%

10%

4%
7%

18%

15%
7%

9%

8%

7%

12%

11%

40%
24%

Other

6%

12%

34%

38%

31%
14%

Top 10

9%

33%

39%

16%
26%

14%

Top 5

16%

18%
29%

44%

Top 3

12%

14%

44%
30%

7%

34%

44%

43%

15%

16%

10%

11%

15%
15%

19%
11%

2008 2014

2008 2014

2008 2014

2008 2014

2008 2014

2008 2014

Pressure
pumping

Coiled
tubing

Offshore
drilling

Completions
equipment &
services

Drilling
fluids

Land
drilling

Source: Spears & Associates

If this market bias persists, the oilfield services sector may gravitate towards a
super-competitor structure. Super-competitors are companies that develop a clear
idea of what the company does best and how it creates value. They focus their
investment on the capabilities in support of this idea. Their advantaged position
is often achieved by sharper customer focus, a drive for innovation and ability to
gain scale in their specific markets. In oilfield services, super-competitors will likely
be large-scale category leaders who can use technology to create a defensible position, build a cohesive platform organically or through acquisitions, and apply
capital discipline to maintain portfolio excellence.
These changes resemble those which occurred in previous downturn cycles and
yielded large service specialist companies. The thesis of specialist consolidation
produced outstanding shareholder value creation for many years. Companies focused on internal capabilities while building a portfolio of products and services
to address customer needs are more likely to be rewarded by the market compared
to the players that are all things to all people.
The overall M&A market for oilfield equipment and services through 3Q16 re-

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

35

12/5/16 1:22 PM

T1: DIFFERENCE IN TOTAL SHAREHOLDER RETURNS


Category leaders

Regional diversified
players

Integrated service
providers

Product/Services

Single category

Multiple categories

Full suite

Regions

Global

Multiple regions

Global

Customers

E&P, IOC, NOC

E&P, IOC

E&P, IOC, NOC

Relatively high
tech
Moderate capital
requirements
Differentiated
technology
Differentiated
service
Premium price

Characteristics

Annualized TSR
(2012-2015)

Relatively low tech


Moderate capital
requirements
Customer service
focus
Aggressive pricing

+12%

Relatively high tech


High capital requirements
Differentiated technology
Integrated services
Tailored pricing

-13%

+1%

mains muted relative to 2014 activity, as market participants have been largely
sidelined due to a large bid-ask spread, volatility in commodity prices, lack of acquisition capital, and continued uncertainty about the timing and shape of the
recovery. Average quarterly deal volume from 1Q15 to 3Q16 is down 45% from
2013-2014 as shown in Figure 3. In 2016, the select deals that are getting done are
market defensive reactions, while companies with clean balance sheets are looking
for consolidation opportunities or product adjacencies.
POSITIONING, DEALS STRATEGY

In light of the changing landscape ahead, now is the time for oilfield services companies to review market positioning. Consolidation activity is expected to take
many forms: mergers to gain economies of scale, strategic acquisitions to gain
critical mass or technologies in specific categories, and nontraditional forms such
as joint ventures and strategic alliances to access the above mentioned benefits in
a difficult capital market environment. What is the right strategy for oilfield service
companies in todays market?
To avoid the common pitfalls that plague transactions, successful dealmakers should
consider several key factors: How are we positioned today and which capabilities do
we need to enhance or obtain in order to deliver the winning value proposition to
our customers?
F3: AVERAGE QUARTERLY DEAL VOLUME FROM 1Q15 TO 3Q16
13
12

Deal value ($ billions)

40
35

Value of OFS deals


??????????????
Number of OFS deals

Halliburton/
Baker Hughes
deal
11

25

10
5
0

7
6

15

16.0

11.1

6.9

6.1
2.7

12
10

30

20

14

0.4

1.6

1.3

1.7

4
1

0.1

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Number of deals

45

Source: PwC Deals Webcast

36

1612ogfj_36 36

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Which deals best fit with our position


and allow us access to desired
capabilities?
Are targets business models complimentary to our own?
Should we buy or seek an alternative
way to obtain access to these
capabilities?
How should we execute the deal?
Successful companies develop a deal
value proposition that differentiates
them from their peers and enhances
growth potential. Furthermore, deal
strategy and a way to play should be
aligned with current asset strength and
liquidity position. The appropriate
course of action for a given company
can be defined by its fit in one of the
following four categories:
Healthy companies with strong
assets and liquidity are positioned to
be consolidators or integrators to
fill-out their capability portfolios. If
a company prefers building out its
platform through organic growth or
is in pursuit of a capital-light strategy,
it can consider strategic alliances or
JVs with complementary entities in
lieu of an acquisition or merger.
Liquidity challenged - companies
with productive assets, but near-term
liquidity issues might find deals a way
to alleviate liquidity pressures while
providing the counterparty much
needed asset strength. As such they
are not in position to play offense and
integrate product offerings through
acquisitions. Instead, they can act as
aggregators or platform providers to
drive to industry consortia that will
deliver more of an open source integrated solution to the industry.
Treading water - players with weaker
assets, but solid balance sheets have
an opportunity to re-invent their core
and improve asset productivity
through deals. They can seek to become category leaders by re-positioning and divesting non-core assets.
Such specialist players are likely to
emerge from shedding of eroding
cores and defining how to drive a
higher level of scale and lower cost
in the sub-segment.
| OIL & GAS FINANCIAL JOURNAL

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F4: GLOBAL ENERGY M&A CONSIDERATION MIX1


100%

59

61

135

216

180

200

290

460

506

640

535

452

589

584

572

485

1272

948

Number of deals

Stock
Mix2
50%

Cash

0%

Value of deals ($ billions)

100%

$161

$99

$86

$88

$38

$25

$55

$136

$161 $153

$94

$106 $140

$143 $154

$95

$693 $541

Stock
Cash

50%

0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

1Includes deals in which 100% of the target was acquired


2Includes deal in which consideration included a combination of both cash and stock
Source: CapitalIQ, PwC analysis

Distressed - To stabilize and improve financial performance,


companies with higher likelihood of default and low asset
productivity can evaluate structural changes. Selling assets
or businesses that are not accretive to future earnings can
help a distressed entity survive and come out of the downturn stronger, perhaps as a value player or fast follower.
While most executives focus on the valuation and transaction execution elements, they should increasingly also think
about how the transaction will leverage or enhance their
capabilities. For instance, a large engineering and construction
company recently announced its intent to merge with a leading
subsea equipment and service player that will significantly
strengthen its technological innovation capability and provide
access to a higher margin segment, creating integrated benefits
from the combined offering. M&A deals that leverage or enhance a companys capabilities outperform other deals by
14% of annual total shareholder return per a recent PwC study.
Deal makers should also pay careful consideration to
deal-making experience and deal size. Deal-making is a capability unto itself and those with strong, repeatable deal
processes tend to realize between 30-40% more value than
those that make one-off acquisitions. Deal size also matters
as most successful dealmakers often start small and ramp up,
enabling company knowledge and capabilities to increase
over time while reducing the impact of failed acquisitions.
Larger deals can be very difficult to integrate and consume
DECEMBER 2016

1612ogfj_37 37

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

resources needed for the buyers legacy business.


Beyond traditional M&A, companies are transforming the
landscape by formulating partnership strategies and considering different service models. For example, a leading oilfield
services firm partnered with a global foundation drilling
equipment manufacturer to deliver the rig of the future, enabling new integrated services. Leading oilfield services companies are evolving both their product and service approaches,
with the industry being dramatically reshaped by use of technology. New products are using higher levels of data and
analytics to improve performance and increased automation
to reduce reliance on human interactions. Companies are
delivering new products on ever-decreasing innovation cycles
through creative use of ecosystems and partnerships. Services
are becoming more bundled (if not integrated) and knowledge
sharing across the E&P value chain is improving.
ACCESS TO ACQUISITION CAPITAL/
HOW DEALS GET DONE

Acquisition capital has been in short supply for certain players


in oilfield services sub-sectors that are out of favor with investors, and/or those with weaker balance sheets. While some
capital markets activity in the oilfield services sector has been
observed, they primarily tend to be for capital structure repair
and/or to shore up balance sheet versus for use as acquisition
currency.
37

12/5/16 1:22 PM

In these situations, companies have been forced to find


more creative methods to be acquisitive. With all the private
equity money that has been raised to invest in the oil and gas
space (around $100 billion in dedicated energy PE and another
$75 billion in energy focus from diversified funds), financial
sponsors have been the capital of choice as they typically offer
the highest degree of flexibility in terms of structure and an
understanding of the situation as it fits within the private
equity mandate. While private equity capital typically comes
at a high cost, financial sponsors have been willing to forgo
the traditional 25% hurdle rate and 3x payback to play in
multiple parts of the capital structure, and thus accepting
lower return for the tradeoff of higher securitization.
During the recent high-price cycle between 2011 and 2014,
cash was the preferred deal currency forcing the acquirer to
take on all of the pre-closing market risk. During 2015, we saw
a transition towards more of mixed consideration or even
all-stock deals as depicted in Figure 4.
While management impetus has historically been the primary driver of M&A, in this market, access to capital is now
a key constraint. This tangible component is creating a very
clear bifurcation between those being aggressors and those
being defensive.
In the current depressed market environment, strategic
buyers are in an advantages advantageous position due to the
fact that synergies account for a greater percentage of transaction value than in a stable market. Therefore, they are often
in a position to pay a higher premium. Additionally, strategic
buyers have the advantage of offering stock consideration,
providing certain tax benefits and giving sellers an opportunity
to share in the potential recovery upside. A stock deal allows
the buyer to maintain financial flexibility without added
covenants and constraints that are typical of debt capital. A
stock buyer also keeps any potential collateral clear of debt
burden, and thus maintains optionality for future levered
acquisitions, or access to rainy-day funds.
However, when equity is used as currency in M&A, the line
between buyer and seller becomes blurred: an all-stock offer
involves evaluating several questions:
Is the offer a fair price?
Are the shares of the acquirer fairly valued?
Is the combined company an attractive investment?
SECTOR ACTIVITY OUTLOOK

In response to the recent commodity price decline, companies


have been right-sizing their cost structure to the lower-for-longer environment and strengthening balance sheets.
Following a period of fragmented growth, the oilfield services
market has become intensely competitive and is likely evolving
towards category leaders. Strategic buyers are considering
deals to achieve scale, fill in portfolios or enhance capabilities.
However, their options depend on the companys liquidity,
asset strength, and access to capital markets.
While the downturn put the oilfield service industry
38

1612ogfj_38 38

through the ringer, many executives think the worst is behind


us. Commodity prices have rebounded modestly with Brent
crude currently trading in the $48-$53 range compared to the
lows of $26/bbl early this year. The Energy Sector ETF volatility
index is down by about 50% from the highs observed in February 2016, indicating that market anxiety has subsided. This
stabilization of commodity and equity prices should provide
support for the deal market to pick up.
Limited M&A activity observed during this down cycle has
left many attractive acquisition targets on the market, so
prospective buyers have plenty of choice. In many sub-sectors
consolidation is near a strategic necessity for the elimination
of the marginal player, and is likely to come via the forced
hand of bankruptcy. An uptick in mega-deals may create a
domino effect of reactionary transactions from competitors
not wanting to miss out on the quality assets.
Now, as the dust settles, the sector appears to be ready for
consolidation. Many companies have already publicly stated
their intent to use this opportunity to consolidate and a few
have already started making their moves. While the availability
of acquisition capital will likely provide some headwinds to
consolidation, companies are expected to look for creative
solutions to pursue the right strategy.
ABOUT THE AUTHORS

Doug Meier leads PwCs Deals practice in Houston,


Texas. He is also the Oil & Gas sector leader for the
Deals group. Working with companies contemplating cross-border acquisitions, Meier has advised
clients headquartered in countries throughout Europe, Asia/Pac, Latin America and North
America.
Mile Milisavljevic is a principal in PwCs deals practice in Houston. Milisavljevic is focused on organizations undertaking transformative change: developing breakthrough strategy and developing
organizational capability to execute.

Gregg Byers is a managing director in the Houston


office of PwC Corporate Finance where he leads
the coverage effort for the oilfield services sector.
His career experience includes over 20 years of
domestic and international strategic financial advisory work for both corporate and private equity
clients.
Kyle West is a director in PwCs Transaction Services
practice based in Houston. He specializes in financial, economic and accounting analyses involving
complex business transactions. His experience includes a wide range of M&A issues including acquisition due diligence, value drivers, purchase
agreement negotiation, and sell-side diligence, among others.
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12/5/16 1:22 PM

Upstream capital cost review


A FRESH APPROACH TO ENGINEERING AND PROJECT DELIVERY
COULD HAVE LONG-LASTING IMPLICATIONS FOR PROJECT COSTS
MARK ADEOSUN, DOUGLAS-WESTWOOD, HAVERSHAM, UK

PRIOR TO THE OIL PRICE DOWNTURN, cost reductions for

offshore projects were a major issue in the industry, as both


CAPEX (capital expenditure) and OPEX (operational expenditure) were escalating at an unsustainable level while oil prices
reached a plateau. As a result, a number of projects were already
stalled even before the downturn, with Shells Bonga South West
and Chevrons Rosebank being high-profile examples.
The decline in commodity prices since 2014 has greatly exacerbated this trend, resulting in a large reduction in project
sanctioning, with the number of FIDs ( final investment decisions) taken in 2016 expected to be 81% lower than the number
of offshore projects sanctioned in 2012.
Sustained low oil prices have placed more pressure on exploration and production companies, which has resulted in
operators taking a more conservative approach to field development. Most projects have undergone a review of the development concept, and many have been completely re-engineered
to be profitable at a lower oil price. Subsequently, only the most
cost-efficient projects are being sanctioned, with the focus for
40

1612ogfj_40 40

many companies being cost management so that dividends


can be maintained through the downturn.
The immediate impact of the downturn was a squeeze on
the supply chain by E&P companies, which have pushed for
continued price reductions for services and equipment, usually
with success. Reduced activity levels have led to a continued
over-supply of some asset classes. Rig and vessel utilization are
among those that have fallen most dramatically, with some day
rates plummeting by more than 60%.
A large part of re-engineering has been a drive to simplify
project development, with the often touted industry-wide
standardization a key method of achieving this. Early in 2016,
US supermajor Chevron Corp. cancelled plans to develop its
Buckskin and Moccasin projects in the ultra-deepwater Gulf of
Mexico, citing challenging market conditions. However, Repsol
later acquired Chevrons stake in the Buckskin project, looking
to revive the economic viability of the field with the aim of
developing it as a tieback to Anadarkos nearby Lucius facility.
Anadarko has stated that using standardized equipment will
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| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

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further reduce costs. This highlights how industry-wide standardization can lead to cost savings while also simplifying field
development.
Another example of an independent reworking the development concept of a stalled field and steering it back on track is
Anadarko, having assumed the operatorship of the Constellation
field, also in the Gulf of Mexico. The field (previously called
Hopkins) was operated by BP, which envisioned a semi-sub
development that proved uneconomic at current oil prices. As
a result, Anadarko took over as operator and announced recently
that it intends to develop the field as a tieback to its Constitution
spar.
It is important to note that operators are sometimes faced
with regulatory and political limitations in the selection of the
cheapest development option possible. An example of such a
project is the Abadi gas field, where the Indonesian government
favored an onshore liquefaction development as opposed to
Inpexs preference for a 2.5-mmpta floating liquefaction unit
for the initial development phase. A development plan is expected to be submitted later this year which will utilize an
onshore plant.
One of the key reasons for the oil price collapse was the
dramatic change in output from the US, which went from being
a major importer to being self-sufficient due to the revolution
in shale production. However, US unconventional production
is typically more expensive than conventional onshore production, with higher drilling and completion costs compared to
that for conventional. As a result, this sector has been particularly hit hard by the oil price crash, with a large number of
companies going bankrupt and others cutting back on drilling
activity. The US land drilling market is particularly susceptible
to fluctuations in commodity prices, with drilling activity having
been significantly reduced as a result of the downturn.
Despite this, output remains relatively high from the most
productive basins, and a focus on efficiency and innovation has
led to better returns. This is due to the fact that drilling and
completion (D&C) and estimated ultimate recovery (EUR) costs

ABOUT THE AUTHOR

Mark Adeosun is the author of The World LNG


Market Forecast 2017-2021, which examines trends
in the LNG market by region and facility type, supported by analysis, insight, and industry consultation. He has authored various industry reports and
has conducted high-level research into various oil
and gas projects. Adeosun has a BSc degree in geology and a
masters degree from the University of South Wales in geographic
information systems (GIS).
F2: GLOBAL AVERAGE DEVELOPMENT COST
PER BARREL INDEX
110

120

100

100
80
60
40
20
0
2012

DECEMBER 2016

90
80
70
60
50

2013

2014

2015

Source: DW250 Capital Cost Briefing

1612ogfj_41 41

have come down substantially, with a number of factors responsible for this.
A reflection of how the US rig market has been affected is
indicative in the Baker Hughes rotary rig count reported in May
2016, with active rig numbers at the lowest point on record at
374 active rigs. This has driven equipment and land rig costs
down dramatically. However, there are signs the market is
improving, with the latest active rig numbers on an upward
trend to 513 active rigs reported in mid-October, a 37%
increase.
In the current oil price environment, DW250 Capital Cost
Briefing analysis shows that development CAPEX per barrel for
deepwater projects declined substantially by 41% over the
2012-2016 period, while the US shale D&C cost per barrel also
declined by 36% over the same period.
As the market begins to recover, some of these cost savings
will inevitably unwind. However, the opportunity to develop a
fresh approach to offshore engineering and project delivery
could have long-lasting implications for project costs and predictability.

Cost per barrel index

Offshore sanctioned project index

F1: NUMBER OF OFFSHORE PROJECTS SANCTIONED


INDEX, 2012-2016

Anadarko has stated that using standardized


equipment will further reduce costs. This highlights
how industry-wide standardization can lead to cost
savings while also simplifying field development.

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

2016

40
2012

Deep water
Shallow water
Onshore
US shale

2013

2014

2015

2016

Source: DW250 Capital Cost Briefing


41

12/5/16 1:22 PM

Are the easy times ending for refiners?


DECADE AHEAD COULD PROVE CHALLENGING, SEPARATING THE BEST FROM THE REST
PEDRO CARUSO, BAIN & CO., HOUSTON
DIEGO GARCIA, BAIN & CO., BUENOS AIRES
JOS DE S, BAIN & CO.., SO PAULO

in the summer of 2014 wreaked havoc on


many upstream and midstream businesses, but refiners have enjoyed a period of
comparative prosperity as low crude
prices buoyed margins. Now, as prices
begin to recover, those easy times may
be coming to an end. Margins have already tightened as crude oil prices stabilized and refiners began to pass their
savings on to customers. Moreover, in
the next few years, refiners will have to
cope with several long-term challenges
sure to separate leaders from laggards
and possibly force some poor performers
from the field.
First, the global supply of crude continues to get heavier and sourerthe US
is an exception, thanks to the rise of light
tight oil productionputting pressure
on smaller, less complex refiners.
Second, new refineries are coming
online that could boost capacity beyond
demand, especially in the Asia-Pacific
region. Their preferential access to markets, crude stocks and affordable labor
supplies will make life harder for other
refiners that operate where labor and
energy costs are higher. Overcapacity
may be an even greater challenge in some
developed markets that may be reaching
peak demand and leveling off, including
the United States West Coast and
Midwest.
Third, regulations are becoming more
stringent, especially in developing economies. Mexico, for example, is adopting
rules that will require heavy-duty vehicles
there to comply with emission standards
as strict as those in the European Union.
Some refining segments are better
positioned to thrive in this changing environment than others, depending on
their markets, operating conditions and
asset portfolio.
Markets. Consumption of refinery
42

1612ogfj_42 42

Alain Juteau | Dreamstime.com

THE COLLAPSE of oil prices that began

products is shifting from developed to developing markets, especially to China and


other developing countries in the Asia-Pacific region, favoring refiners there as well
as the national oil companies (NOC) in the Middle East and Commonwealth of Independent States (CIS) independents, who have competitive access to this market.
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F1: REGIONAL BALANCES IN 2013 AND 2019


THOUSANDS OF BARRELS PER DAY
2 Europe
Gasoline

1 Stable, riding the light tight oil boom to


remain a net exporter to Latin America
and Europe

Diesel

718 652

1 OECD Americas

4 CIS

Gasoline

Gasoline

Diesel

Diesel
897 835

984 995
469 528
-1057

145

3 Integrating downstream, deploying the


advantage from local oil to supply
Europe and Asia-Pacific

-1592

-205

3 Middle East
Gasoline

Diesel

1023

6 Latin America
Gasoline
Diesel

702

-471 -526

7 Africa

762

5 Asia-Pacific
Gasoline

Diesel
1280

358

469
-559 -548

Gasoline
-143

Diesel

-332

-974

-657

2 Continued need for diesel imports and


competition for gasoline exports force
M&A and closures

-998

-1490

The Middle East and CIS are likely to strengthen their positions as net exporters,
while Europe, Latin America, Asia-Pacific countries and Africa will import more.
Notes: Positive numbers indicate net export potential, negative numbers net import
requirements. 2013 net exports do not equal imports due to feedstock trade and
product classification differences.

4 Investing to supply diesel to Europe


and Asia-Pacific, but upgrading
outdated capacity is a challenge
5 Attempting to reduce imports with
massive capacity additions, but not
enough to offset demand growth
6 Efforts to increase local capacity and
revert import status facing major
financial and technical challenges
7 Historic importer, trying to expand into
refining but facing financial, operational
and commercial challenges

Sources: US Energy Information Administration, OPEC 2015 World Oil Outlook, Bain analysis

Operating conditions. Middle Eastern NOCs and CIS refiners


have good access to feedstock, lower energy costs and efficient
capital, all of which can give them an edge in operations. European independents and Latin American NOCs may find it harder
to make gains. Africa, given its low labor costs and surplus of
crude, seems a good candidate for refinery operations, but refiners there have not capitalized on these advantages due to a
lack of engineering and construction capabilities.
Asset portfolio. Globally integrated companies and independents in the US and the Asia-Pacific region are best positioned in terms of the scale and complexity of their portfolios,
followed closely by the NOCs in the Asia-Pacific region, the
Middle East and the CIS, which are investing to make their
portfolios more competitive.
These changes will combine to shift the flows of refined
products around the world, with the Middle East and the CIS
becoming the major suppliers to the world, North America
essentially balanced, and Europe, Latin America, Africa and the
Asia-Pacific region remaining net importers.
Clearly, the world will become more complex for even the
most competitive refiners, requiring them to embrace an agenda
of strategic and operational efficiency. The elements will differ
from one refiner to the next, but several key elements will help
refiners remain competitive.
Protect and expand access to markets. Whether focused
on a local market or exports, refiners must understand their
competitive edge and threats.
DECEMBER 2016

1612ogfj_43 43

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

Identify opportunities based on access to feedstock. More


than ever, leading refiners need to enhance the refinerys linear
program model to market demand and price differentials, as
US refiners did with the light tight oil boom.
Achieve operational excellence. Plant reliability, energy
efficiency, front-line labor productivity, SG&A optimization and
working-capital management are key to achieving excellence.
Improve ability to manage capital projects. Better management of projects and vendors will help bring costs in line.
Optimize the refinery portfolio. Pursue full potential for
each refinery without compromising safety, yield, reliability or
environmental compliance.
The decade ahead could prove challenging for refiners, separating the best from the rest. The agenda is likely to be complex:
rising feedstock prices, heavier and sourer crudes, increased
competition, and new regulations. Those who capitalize on the
gains won in the most recent cycle to prepare their organizations
and assets for the challenge are more likely to thrive.
ABOUT THE AUTHORS

Pedro Caruso is a partner


with Bain & Company in
Houston, Diego Garcia is
a principal with Bain in
Buenos Aires and Jos de
S is a Bain partner in So
Paulo. All three work with Bains Global Oil & Gas practice.
43

12/5/16 1:22 PM

Operating profitably with $50 oil


A HYBRID APPROACH PAVES THE WAY TO FINANCIAL SAVVY
PATRICK NG, REAL CORE ENERGY, HOUSTON
GEOFFREY WONG, IAM LEGACY, HONG KONG

OVER THE PAST FEW MONTHS, much

AUTHENTICITY OF INTRINSIC
VALUE-AT-RISK

Investopia.com offers a compact visual


explanation. In essence, the three methods to estimate VaR are: 1) historical
generate histogram of returns and pick
the worst returns as VaR at desired confidence level (e.g., return of histogram at
5% as 95% confidence level); 2)
mean-variance estimate mean and
variance (i.e., standard deviation
squared) from historical returns and
look up VaR assuming returns behave
like a normal distribution or bell curve;
44

1612ogfj_44 44

F1: HISTOGRAM OF (LIGHT OIL)


PRACTICAL IPS FROM ONE PRODUCING AREA
0.10
Normal Fit
Log-Normal Fit
Stable-Levy Fit

0.08

Normalized

has been written on rethinking capital


and resource allocation to operate profitably at $50 oil. The former president
of the Society of Petroleum Engineers
has coined the term FIT@50, that emphasizes both operational excellence
(e.g., cost control, equipment standardization, and technology innovation) and
financial savvy (i.e., portfolio adjustment
and risk management). Thinking
through the downturn (OGFJ, July 2016)
has further raised the bar and put the
challenge at $40.
In a previous article (OGFJ, October
2016), we have adapted the hybrid approach combining bottom-up well modeling and top-down portfolio simulation,
to derive value-at-risk (VaR) for oil and
gas. Post financial crisis, many authors
note that a VaR model built on normal
returns distribution has significant pitfalls, especially over heavy tail losses.
Mindful of pitfalls, we derive intrinsic
VaR directly from oil and gas production
data (not theoretical returns distribution). Using data examples from South
Texas, we illustrate how a hybrid approach paves the way to financial savvy
seeking-alpha portfolio and managing
risk.

0.06

0.04

0.02

0.00

500

1000

1500

2000

2500

3000

3500

BOPD
Note: Dashed lines show the fit of different theoretical models, Normal, Log-Normal, and Stable distributions.
WWW.OGFJ.COM

| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

F2: HISTOGRAMS OVERLAY OF (LIGHT OIL) PRACTICAL IP DISTRIBUTIONS


FROM THREE ASSETS IN EAGLE FORD
160
Asset C
Asset A
Asset B

140
120
Frequency

3) Monte Carlo simulation generate


returns from multiple trials, sort returns
and pick VaR as in historical method.
Figure 1 compares practical initial
production (IP) from the Eagle Ford
shale in South Texas with different theoretical distribution models. While stable distribution is favored by financial
engineers because of its versatility, it
suffices to note that no single theoretical
model matches the actual data adequately, nor generalizes very well. Hence
the case for authenticity. We use oil and
gas production data (Figure 2) and bottom-up well economics model to derive
returns and drive intrinsic VaR.
Bottom Line: If the underlying return
distribution is close to being normal, all
three methods perform well. While the
mean-variance method serves as benchmark, its estimated VaR falls short when
the underlying return distribution is not
a bell curve. In contrast, hybrid intrinsic
VaR lets the data speak and captures
well productivity jumps from innovative
practice over time.

100
80
60
40
20
0

1000

2000

3000
4000
BOPD

POSSIBILITY OF BREAKTHROUGH

Hybrid is unique in two aspects: 1) authenticitydrill down to individual wells


and use actual oil and gas production
data without assuming the distribution
of underlying returns to estimate the
intrinsic portfolio VaR, and 2) transparencymodel enables practitioners to
conduct systematically what-if factor
analysis.
Most important of all, as a -learning
tool, hybrid helps us develop deeper
insights into risk-return sensitivity with
respect to WTI swings, acreage quality,
operating efficiency, and technology
innovation, individually and in
DECEMBER 2016

1612ogfj_45 45

6000

7000

Source: Rystad Energy

F3: PORTFOLIO RETURNS


100
VaR 99% = -0.82
VaR 95% = -0.70
VaR 90% = -0.60
VaR 75% = -0.36
Median = -0.10

80

Frequency

EQUILATERAL PORTFOLIO

As a learning process, we assign equal


portfolio weights to the three assets (
each) and a West Texas Intermediate
(WTI) mid-range scenario (i.e., $60 to
$80 oil over next 15 to 18 months). Convert prac IPs into returns (Figure 3) using
calibrated well economics model, sort
returns into histogram, and pick out VaR
at different confidence levels.

5000

60

40

20

0
-1.0

-0.5

0.0

Returns

0.5

1.0

1.5

Note: Returns generated from bottom-up well economics modeling of equilateral portfolio using
production from individual wells and calibrated breakeven of each asset. Superimposed dashed lines are
value-at-risk (VaR) at different confidence levels. Using different portfolio weights, the shape of returns
distribution will be different.
Data source: Rystad Energy

combination.
As an iterative process, the hybrid approach also facilitates communication
within an organization connecting strategy to execution. With the ability to interact
with financial, operational and technical data, hybrid approach helps organizations
break down silos. Bring together stakeholders to solve a complex problem collaboratively and focus on return naturally.
SEEKING ALPHA PORTFOLIO

Hybrid approach paves the way to seeking alpha portfolio and hedging strategy.

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

45

12/5/16 1:22 PM

First, we partition the return-volatility space into four quadrants (Figure 4) and
display the efficient frontier (e.g., at desired return, unique set of weights that minimizes portfolio volatility). Think of it as the envelope or outer boundary of all
possible portfolios with different sets of weights.
Next, we perform Monte Carlo simulation of all possible portfolios track their
return and volatility. Like astronomers scanning the night sky for distant galaxies
and black holes, we extract the galactic center of gravity by taking average portfolio

Note: Clockwise are quadrant 1 NW, quadrant 2 NE, quadrant 3 SE, to quadrant 4 SW.

weights with each quadrant (Figure 5).


To make the quadrant labels memorable,
we mimic the BCG portfolio matrix.
Interpretation: Note the inverse relation among the diagonal quadrants in
Figure 5. Quadrant 2 (Stars) delivers
higher risk-adjusted return; quadrant 3
(Problem Child) compromises value
with lower return at higher volatility.
The Stars portfolios return and volatility
position is the green star in Figure 6 and
a good destination for portfolio
adjustment.
Seeking-alpha portfolio here means
capturing extra risk-adjusted return.
Imagine return-volatility surface as the
chessboard partitioned into many small
tiles (beyond four quadrants), and implement hybrid portfolio weights adjustment from any starting point to any
destination of higher risk-adjusted return (Figure 6). In action, move from
yellow triangle (equilateral portfolio of
equal weights) to the green star, and
adjust portfolio weights from (, , )
to (0.41, 0.149, 0.441). Another alpha-seeking move from the red triangle
to green star increases return at identical
volatility. In both scenarios, the Sharpe
ratio increases.

F5: QUADRANTS CHARACTERIZATION MIMICS THE BCG MARTIX

MANAGING DOWNSIDE RISK

F4: PORTFOLIO EFFICIENT FRONTIER AND RISK-RETURN QUADRANTS


DEMARCATION (DASHED LINES)
0.6
0.00
0.4

-0.30
0.0
-0.45
-0.2

Sharpe ratio

Expected return

-0.15
0.2

-0.60

-0.4

-0.75

-0.6
0.2

0.3

0.4

0.5
0.6
0.7
Expected volatility

0.8

0.9

1.0

Quadrant by average

Portfolio weights

1.0
0.8

Comfort

Stars

Dogs

Problem child

0.6
0.4
0.2

Portfolio weights

0.0
1.0
0.8
0.6
0.4
0.2
0.0

Note: Bar charts show the average portfolio weights of all the portfolios that fall within each quadrant.
46

1612ogfj_46 46

WWW.OGFJ.COM

Because VaR figures are relatively


straight-forward to compute, they serve
as a convenient means to quantify and
make sense of a distressed situation. As
a reality check, we have normalized hybrid VaRs from our South Texas equilateral portfolio to daily VaR (Table 1). They
are comparable to that of a diversified
investment portfolio that spans multiple
asset classes of bonds, equities, and
emerging markets.
Financial Assets: Take the second row
as an example. On average, there is a 5%
chance that the portfolio would lose at
least 3.42% on a particular day. In other
words, on average, once every 20 days
the portfolio would suffer a daily loss of
at least 3.42%. When a loss reaches or
exceeds a given threshold, a VaR break
occurs. Armed with this statistical information, an asset management firm
needs to ensure that it is prepared to
| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

F6: SCENARIOS OF PORTFOLIO ADJUSTMENTS


Efcient Frontier A-B-C & Monte Carlo Simulations of 2500
0.6
0.00
0.4
-0.15
0.2
-0.30
0.0
-0.45
-0.2

Sharpe ratio

Expected return

handle the fallout of a VaR break. A


low-probability distressed event will
probably trigger failures with some market participants, which will increase the
counterparty risks significantly for everyone else. Therefore, a portfolio manager has to regularly review individual
positions (especially derivatives) within
the portfolio and be comfortable with,
and ensure the capability to withstand,
the potential counterparty risk.
Oil and Gas Producing Assets: The
time horizon for an operator is different.
While we wont be liquidating producing
assets at the click of a mouse on a daily
basis, the notion of VaR break is useful.
For example, an organization with a
strong balance sheet and a healthy risk
tolerance may choose to hedge at VaR
break of 75% confidence level (Figure 3),
whereas a more risk-averse player may
opt to hedge at VaR 90%.

-0.60

-0.4

-0.75

-0.6
0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Expected volatility
Note: Yellow triangle represents equilateral portfolio, green star a desired destination, and red triangle
some arbitrary portfolio. Anchor points on the efficient frontier are the minimum-variance portfolio
(yellow star) and Sharpe portfolio (red star).

CONCLUSION

Why hybrid? Anchored on oil and gas


production data, 1) hybrid portfolio highly scalable across plays (OGFJ July
2016 ) as well as within a field at the
asset level; 2) intrinsic VaR - free from
the pitfalls of normality assumption and
limitations of theoretical distributions.
Benchmark core acreage, simulate whatif scenarios and aggregate portfolio returns seamlessly. Transform production
data into actionable prescriptive
analytics.
With authenticity and transparency,
insights gained in the process of deriving
portfolio weights and intrinsic VaRs will
become more valuable than the numbers
themselves. The more scenarios we work
the relative allocation weights and visualize the impact on risk-return dynamics,
the better we develop robust strategy
and adapt to changes.
To hedge or not to hedge? With hybrid, the journey ahead is less a challenge and more an opportunity to learn
and manage risks and develop a financially and operationally savvy priming
portfolio and hedging strategy into a
durable competitive advantage.
The combination of hybrid portfolio
and intrinsic VaR modeling makes a
DECEMBER 2016

1612ogfj_47 47

powerful duo for


opportunistic acquisitions and divestitures and managing the downside
risk. Hybrid closes
the loop in seeking
alpha and connects
strategy to execution.

T1: COMPARISON OF VARS


Daily VaR (confidence)

Financial assets
profit & loss (%)

South Texas assets profit


& loss (%) normalized

VaR (90%)

-2.64%

-3.40%

VaR (95%)

-3.42%

-3.96%

VaR (99%)

-4.89%

-4.60%

VaR (99.9%)

-6.53%

-4.87%

Note: Comparison of VaRs from an actual diversified investment portfolio and that from
our portfolio of producing assets in South Texas.

ACKNOWLEDGEMENT

We thank Andrew Conacher of Rystad Energy for providing the data used in model
calibration and VaR analysis.
ABOUT THE AUTHORS

Patrick Ng (png@recoenergy.com) is a partner at Real Core Energy in


Houston. Ng has a focus on acquisitions and divestitures. He held operations and technology leadership positions at WesternGeco and Fugro,
developing and bringing solutions to market at the intersection of data
and technology. He earned his MS in Geology and Geophysics from Yale
University and MBA from University of Houston.
Geoffrey Wong, CFA (geoffreywong@iamlegacy.com) is a portfolio
manager at IAM Legacy, a family office in Hong Kong. He has worked
previously as an analyst and a portfolio manager for several major financial institutions and boutique investment banks in New York, London,
and Hong Kong. He received a BA from University of California, Berkeley
and an MEng from Cornell University.

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

47

12/5/16 1:22 PM

New SEC rule aimed at oil companies


RULE 13Q-1 CONCERNS PAYMENTS TO US AND FOREIGN GOVERNMENTS
LARA A. COVINGTON, HOLLAND & KNIGHT LLP, WASHINGTON, DC
LISA A. PRAGER, HOLLAND & KNIGHT, NEW YORK

required to report payments made to US


or foreign governments under a new SEC
rule that went into effect on Sept. 26, 2016.
The reporting rule, called Rule 13q-1, requires detailed reports of payments made
to governments for the commercial development of oil, natural gas, or minerals.
The new rules were announced on the
heels of similar initiatives adopted by the
European Union (EU Accounting Directive and EU Transparency Directive),
Canada (the Extractive Sector Transparency Measure Act), and the Extractive
Industries Transparency Initiative.
As the rule takes effect, oil and gas
companies may have to report more than
just payments to US and foreign governments. Rule 13q-1 is part of the US policy
to combat global corruption, promote
accountability, and improve governance
in resource-rich countries. It is also the
result of a protracted rule-making that
included challenges by the American Petroleum Institute (API), US Chamber of
Commerce, and others as well as more
than 150 unique comment letters and
more than 149,000 form letters.
One of the chief concerns for many oil
and gas companies was the public reporting of project-level data and the potential
for competitive harm. Another issue that
received decidedly less attention during
the rulemaking is the impact of the anti-evasion provision and how it will require even further disclosures of certain
payments traditionally within the ambit
of the Foreign Corrupt Practices Act
(FCPA), i.e., payments intended to benefit
foreign government officials that are
made pursuant to the commercial development of oil and gas.
REPORTING UNDER RULE 13Q-1

The new rules apply to oil and gas companies, but also more broadly to resource
extraction issuers, which includes all US
48

1612ogfj_48 48

Benjamin Haas | Dreamstime.com

OIL AND GAS COMPANIES are now

and foreign companies engaged in the commercial development of oil, natural gas, or
minerals that are required to file SEC Form 10-K annual reports. The requirements
also cover the subsidiaries or affiliate entities included in a reporting companys consolidated financial filings. Subject companies must disclose information about the type
and total amount of payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments
made to each government, among other details.
Under Rule 13q-1, commercial development is defined as exploration, extraction,
processing, and export, or the acquisition of a license for any such activity. Project
means operational activities that are governed by a single contract, license, lease,
concession or similar legal agreement that forms the basis for payment liabilities with
a government.
A payment or series of related payments must amount to at least $100,000 during
the same fiscal year to fall under Rule 13q-1. Payment includes taxes; royalties; fees,
including licensing fees; production entitlements; bonuses; dividends; payments for
infrastructure improvements; in-kind payments; and if required by law or contract,
community and corporate social responsibility (CSR) payments.
Rule 13q-1 includes two targeted exemptions. The first provides transitional relief
for companies that acquired an entity not previously subject to the final rules and allows
them to delay reporting payment information for the acquired company until the first
fiscal year following the acquisition. The second exemption provides a one-year delay
in reporting for payments made in connection with exploratory activities, which was
intended to address concerns from the API about the potential competitive harm that
could be caused by disclosing payments to local governments in connection with
high-potential exploratory territory and other commercially sensitive information.
The rule also permits the SEC to provide relief from the requirements of the rules on
a case-by-case basis; for example, where the required payment disclosure is prohibited
under the host countrys laws.
WWW.OGFJ.COM

| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

ANTICIPATED INDUSTRY EFFECTS OF RULE 13Q-1

Under the Rule 13q-1 reporting regime, oil and gas companies
will likely see an increase in voluntary disclosures and investigations under the FCPA due to the rules anti-evasion
provision.
The FCPA prohibits corrupt payments to foreign officials
and political parties for the purpose of obtaining or retaining
business, securing an improper business advantage, or influencing or inducing an official act by the official or political
party. But the FCPA does not impose a mandatory disclosure
requirement on such payments unless they are deemed
material.
Rule 13q-1s anti-evasion provision captures payments that
are related to the commercial development of oil, natural gas
or minerals but are structured to avoid disclosure. This includes
payments intended to benefit individual government officials.
For example, payments for government expenses, providing
jobs or tuition to persons related to government officials, and
CSR payments to foundations or charities that are favored or
controlled by government officials must all be disclosed if
made to further the commercial development of oil, natural
gas or minerals. In describing the anti-evasion provision, the
SEC recognized that it captures such payments to individuals
and referenced a case study that highlighted the role that
resource extraction companies play in facilitating the suspect
or corrupt practices of foreign officials seeking to divert resource extraction payments that belong to the government.
Because the rule requires oil and gas companies to disclose
payments to individuals that are related to the commercial
development of oil and gas, it will impact the way oil and gas
companies respond to FCPA issues. Typically, when companies
discover an FCPA issue, they conduct an analysis of several
factors to determine whether to voluntarily disclose, and
likelihood of disclosure is usually one of those factors. If the
issue in question involves a payment to an individual related
to the commercial development of oil or gas that will have to
be disclosed under Rule 13q-1, the company will likely feel
compelled to also disclose that payment to the DOJ and SEC.
In addition to increased voluntary disclosure under the
FCPA, US enforcement authorities may use Rule 13q-1 disclosures as leads to investigate possible corruption. Rule 13q-1
is aimed at detecting and preventing corruption, and is thus
a natural source of evidence for FCPA enforcement agencies.
In fact, in issuing Rule 13q-1 and defending the decision to
require project-level reporting, the SEC referenced its experience in implementing the FCPA and explained that disclosed
data could help citizens, civil society groups, and others to
identify payment discrepancies that reflect potential corruption and other inappropriate financial discounts.
For Royal Dutch Shell, the first company to report under
The Reports on Payments to Governments Regulations 2014
in the United Kingdom, a civil society group has already raised
questions about the contents of its report. A review of the
Royal Dutch Shell report by the organization Publish What
DECEMBER 2016

1612ogfj_49 49

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

You Pay revealed that the value of an in-kind production entitlement payment to the Nigerian government for the SPDC
East project ($20.89 per barrel) was less than half of the average
values for other Nigerian payments in kind ($51.59 per barrel).
There are likely many legitimate explanations for this discrepancy, but for an eager investigator, it might be just enough to
launch an inquiry into how the in-kind payment was valued
and whether the official in charge of the SPDC East project
was improperly influenced to accept a lower value.
Payments made through third parties, particularly CSR
payments to foundations or charities, are also likely targets
for US enforcement agencies. To the extent there is corruption
involved with a project, the disclosure of these payments will
provide investigators with information that could lead to the
detection of such corruption.
OIL AND GAS COMPANIES
SHOULD BEEF UP COMPLIANCE

Finally, Rule 13q-1 will likely lead to increased FCPA compliance. As the SEC noted in issuing the rule, reporting project-level data related to payments to governments may also
discourage companies from either entering into agreements
that contain suspect payment provisions or following government officials suspect payment instructions.
In preparing for compliance with Rule 13q-1, companies
should begin a regular review of payments that may need to
be reported under the rules anti-evasion provision, including
auditing projects involving payments to governments and
reviewing any third-party relationships related to those projects. In addition, oil and gas companies should consider reexamining existing corruption compliance policies and procedures and investigating any other red flags raised in
completing projects related to commercial oil and gas development.
ABOUT THE AUTHORS

Lara A. Covington is a partner in the Washington,


DC office of Holland & Knight LLP. She is a
white-collar defense attorney with substantial
experience representing corporations and individuals in connection with investigations and
enforcement actions involving the Foreign Corrupt
Practices Act, US export controls, US economic sanctions,
and other U.S government regulatory issues.
Lisa A. Prager is a partner in the New York office
of Holland & Knight LLP. She is a litigation attorney who focuses on government investigations
and enforcement actions relating to the Foreign
Corrupt Practices Act, US export controls and
economic sanctions laws, anti-money laundering
laws, the Dodd Frank Acts whistleblower provisions, and
government contract matters.
49

12/5/16 1:22 PM

TPH 2025 by 2017


NEED FOR GROWTH CAPITAL SPURS MERGER OF TUDOR, PICKERING, HOLT & CO.
WITH PERELLA WEINBERG PARTNERS
DON STOWERS, CHIEF EDITOR OGFJ

HOUSTON-BASED INVESTMENT bank

and advisory firm Tudor, Pickering, Holt


& Co. is combining with New York-based
financial services firm Perella Weinberg
Partners. The Nov. 14 announcement
said the combined firm will be called
Perella Weinberg Partners, but TPHs
energy practice will continue to operate
as Tudor, Pickering, Holt & Co. The new
firm will have more than $12 billion in
assets under management and will have
offices in New York City, Houston, Denver,
San Francisco, Calgary, London, Dubai,
and Abu Dhabi.
The combined firm will provide financial advisory services, asset management
solutions, and energy securities research,
underwriting, and trading services.
Under the new leadership, Joseph
Perella will serve as chairman, Robert
Steel will be CEO, and Peter Weinberg is
head of the advisory practice. Tarek Abdel-Meguid and Aaron Hood will be coheads of asset management, and Alexandra Pruner, previously CFO of TPH,
will serve as CFO of the combined firm.
Bobby Tudor, previously chairman and
CEO of TPH, will become chairman of
the new TPH and will join the executive
committee of the new PWP. Maynard
Holt, TPH co-president and co-head of
investment banking, will become CEO
of the new TPH. Dan Pickering, co-president and head of TPH asset management, will become president and chief
investment officer of the energy asset
management business and will join the
leadership of the combined asset management business.
Robert K. Steel, CEO of Perella Weinberg Partners, said in a statement, The
addition of TPHs premier energy capabilities and market presence presents
significant opportunities for immediate
and long-term growth in service to our
clients. We recognize the preeminent role
that TPH has built as an energy banker
50

1612ogfj_50 50

Left to right: Bobby Tudor, chairman of the new TPH and a member of the executive committee of PWP; Maynard Holt, CEO of the new TPH; and Dan Pickering, president and chief
investment officer of the energy asset management business. Photo by Syvester Garza.

in North America, the respect it has earned in the industry, and its leadership and
strong voice in Houston. This combination will enable us together to build further
on the great achievements of TPH. We believe TPHs strong suite of asset management
strategies and solutions are poised to benefit from recovery in the energy market and
well-suited to drive further growth and value for investors. The combination also adds
TPHs securities business, renowned for its deep domain research and thought-leadership, which will strengthen our ability to provide industry knowledge. We are excited
to work together to better serve our clients.
TPH will continue as it is today fast moving, knowledgeable, creative, and specialized, added Steel. With deep roots in Texas and the energy industry, we are
dedicated to furthering TPHs strong and distinctive commitment to Houston, the
energy capital of the world.
Bobby Tudor, TPHs chairman and CEO, commented, Perella Weinberg Partners
has a terrific reputation as a trusted advisor to executives at the worlds leading corporations and a culture of superior client service. We believe our clients and employees
will benefit meaningfully from a TPH with broader global reach, expertise in new
areas, and greater access to capital. Our longstanding personal and professional relationships with PWPs leadership team give us great confidence that the two firms
will be even better together. We look forward to partnering with [PWP] and are eager
WWW.OGFJ.COM

| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:22 PM

to capitalize on the opportunities this combination presents


to better serve both firms clients.
Joseph R. Perella, chairman of Perella Weinberg Partners,
added, In our 11th year, we continue to grow and are having
one of the best years for our franchise. In the advisory business,
we continue to work with some of the largest, most admired
companies around the world on complex assignments where
trust and experience matter most. In asset management, we
have grown AUM more than 20% this year, and interest in our
firm on the part of investment managers has never been greater.
In combination with TPHs strong year and continued outstanding performance, this transaction promises to extend the momentum and positions us well for the years ahead.
OGFJ recently spoke with Maynard Holt, who will become
CEO of the new TPH, about the implications of the merger.
One thing Ill share with everyone is that the culture here
at TPH has been great, said Holt. The creativity has been great.
The machine we built has served our clients well. Its worked.
But there has been one big issue. We just have not had the
growth capital we needed to expand. Our firm has never had a
problem generating ideas. TPH is idea-rich, but we have had a
problem implementing those ideas because of the lack of growth
capital. So by combining the two firms, it opens up the prospect
of building the business at a faster pace. We can deliver TPH
2025 in 2017.
Asked to detail some of the combined companys advantages
for TPH and its clients, Holt mentioned three main points:
Perella Weinberg has a large restructuring group that is highly
capable. Restructuring projects are big and complicated and
also very profitable. The old TPH did not have a restructuring
business and probably would not have invested in one because
by the time the company had built one, the market would have
recovered. So the addition of the restructuring group was an
important component of the deal.
PW also has a major Middle East presence with its two offices
in Dubai and Abu Dhabi and 10 people on the ground. Holt
adds that the people who run those offices have been in the
Middle East for 30 years and have formed relationships with
important players there. This opens up future possibilities for
TPH as well.
Finally, Holt emphasized that a critical factor in getting the
deal done was that he and Bobby Tudor had long-standing
relationships with Perella Weinberg principals, including Peter
Weinberg, whom they had worked with previously at Goldman
Sachs. This connection created a certain level of trust on both
sides that was crucial in negotiating the deal, especially since
TPH wanted a certain level of independence and didnt want
their organization and their culture to be swallowed up by the
larger firm. In the end, both sides expect to benefit from the
others experience.
Holt elaborated on how the synergies between the two companies might work: As a single sector specialist, we developed
a lot of methods that are really useful to us and possibly to them.
Perella Weinberg is a financial specialist in multiple sectors.
DECEMBER 2016

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OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

TPH will continue as it is today fast moving,


knowledgeable, creative, and specialized. With
deep roots in Texas and the energy industry, we
are dedicated to furthering TPHs strong and
distinctive commitment to Houston, the energy
capital of the world. Robert K. Steel, CEO of
Perella Weinberg Partners
Now they do have a health-care business, and I think some of
what we do will get exported their way. And we may expand
our research and trading component into health care, which
will be mutually beneficial.
TPH has advised on more than $175 billion of advisory engagements in the upstream, infrastructure, and oilfield service
energy sectors and participated in over $75 billion of capital
markets transactions across those sectors, with a particular
focus on initial public offerings.
Some of the firms notable successes include:
More than 40 deals in the Permian Basin totaling approximately $40 billion, including Encanas $7.1 billion purchase
of Athlon
Transaction leadership in the newly emerging Delaware
Basin, including WPXs $2.75 billion acquisition of RKI and
the recent sale of Centennial for $1.575 billion
A major Bakken effort 13 deals totaling approximately $18
billion, including Statoils $4.7 billion purchase of Brigham
Highly active Uinta, Powder River, and DJ basins effort spearheaded through the firms Denver office, including Nobles
recent $550 million DJ divestiture
A focus on greater Appalachia, Eagle Ford, and the Mid-Continent with 31 transactions totaling $25.2 billion, including
Felixs $1.9 billion sale to Devon
90 corporate M&A deals, including, in the utility space, Clecos
sale to a private equity consortium led by Macquarie and, in
oilfield services, the merger of C&J Energy Services with
Nabors completion and production business
Special committee practice, including the recent Plains All
American Pipeline MLP simplification transaction for $7.2
billion, and El Paso Pipeline Partners $10.8 billion sale to
Kinder Morgan
A well-regarded capital markets team involved in 162 underwritings raising more than $75 billion in proceeds, including
Extraction Oil & Gass IPO and RSP Permians follow-on offering to support the acquisition of Silver Hill
A dominant player in cross-border energy joint ventures with
key roles in many of the more prominent transactions, including CNOOC/Chesapeake and Sinochem/Pioneer
A newly established 10-person office in Calgary
Weil, Gotshal & Manges LLP and Vinson & Elkins LLP provided legal counsel to PWP and TPH, respectively. Terms of the
transaction were not disclosed, but the deal is expected to close
by the end of the year. The combined company will employ
more than 650 people.
51

12/5/16 1:22 PM

DEAL MONITOR

Permian continues to roll,


but other areas pick up steam
ANDREW DITTMAR, PLS INC., HOUSTON

PLS INC. reports that halfway through Q4, US upstream deals

Bakken provide opportunities to grab oily acreage at prices


under $10,000/acre, far less than what is available in the
Permian.
Naturally, even deals in other plays cant escape the shadow
of the Permian, which now is running almost as many land
rigs as the rest of the US combined (229 of 563 total per Baker
Hughes).
In the Permians Midland Basin, SM Energy is quickly deploying proceeds from the aforementioned sale of its Bakken
assets to help fund the $1.6 billion acquisition of Midland Basin pure-play QStar LLC. These assets are in primarily in Howard County, where SM also bought Rock Oil for $980 million in
August. The Delaware Basin also continued its streak of producing some of the largest deals in the upstream space. Along
with some unrelated waterflood assets, Occidental picked up
an additional working interest in its core Delaware Basin area
from a series of private sellers for nearly $2 billion. The deal
added 35,000 net acres at a cost of almost $42,000/acre. The

have gained momentum across a diverse range of resource


plays. Four plays outside of the ever-popular Permian (Bakken, Eagle Ford, Marcellus and Cotton Valley) have seen at
least $500 million in deals recently. The Bakken notched its
largest deal since 2014 when SM Energy agreed to sell its assets in McKenzie and Williams counties, North Dakota, to Oasis Petroleum for $785 million. That is the largest transaction
in the play since Whiting Petroleum acquired Kodiak Oil &
Gas in 2014 for $6.0 billion. Like many recent, large E&P deals,
Oasis funded the majority of the price with an equity offering.
The Eagle Ford also saw one of its biggest deals of the year
with WildHorse Resources buying a large position from Clayton Williams Energy for $400 million. The assets are in the
eastern Eagle Ford area, a departure from other notable 2016
Eagle Ford deals concentrated in the western Eagle Ford.
WildHorse additionally made two smaller recent deals in the
same area as it gears up for an IPO. Both the Eagle Ford and

PLS INC. MONTHLY DEAL MONITOR 10/17/16 - 11/16/16


SELECT US UPSTREAM TRANSACTIONS
Date
Announced

Buyer

Seller

Value
($MM)

Asset Location

Deal Type

O/G

8-Nov-16

Earthstone Energy

Bold Energy III LLC

$299

Permian: Midland Unconv.

Corporate

Oil

31-Oct-16

Occidental

PLS Confidential

$1,765

Permian: Delaware Unconv.

Property

Oil

31-Oct-16

Castleton Commodities International

Anadarko

$1,000

East Texas: Cotton Valley

Property

Gas

25-Oct-16

EQT

Trans Energy; Republic Energy

$513

West Virginia: Marcellus

Corporate

Gas

24-Oct-16

WildHorse Resources

Clayton Williams

$400

Gulf Coast: Eagle Ford

Property

Oil

20-Oct-16

Tug Hill

Stone Energy

$360

West Virginia: Marcellus

Property

Gas

18-Oct-16

SM Energy

QStar

$1,600

Permian: Midland Unconv.

Corporate

Oil

18-Oct-16

Oasis Petroleum

SM Energy

$785

North Dakota: Bakken

Property

Oil

Total

$6,722

SELECT GLOBAL MIDSTREAM TRANSACTIONS


Date
Announced

Buyer

Seller

Value
($MM)

Asset Location

Deal Type

Asset Type

16-Nov-16

Cone Midstream

Noble Energy; Consol Energy

$248

US: Marcellus

Dropdown

Gas Gathering
Pipeline: Gas

1-Nov-16

TransCanada

Columbia Pipeline Partners

$915

US: Diversified

Corporate

31-Oct-16

Dominion Midstream Partners

Dominion Resources

$1,725

US: Rockies

Dropdown

Pipeline: Gas

25-Oct-16

Energy Transfer Partners

PennTex Midstream Partners

$738

US: Louisiana

Corporate

Gas Processing

20-Oct-16

NuStar Logistics

Martin Midstream Partners

$107

US: Texas Gulf Coast

Asset

Oil Storage

Total

$3,733

Prepared by PLS Inc. For more information, email memberservices@plsx.com


Validity of data is not guaranteed and is based on information available at time of publication.

52

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| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

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DEAL MONITOR

acquisition price is further proof that core southern Delaware


acreage, which started 2016 trading for notably less than in
the Midland Basin, has caught up in value.
In addition to the oily Permian, Eagle Ford and Bakken, gas
deals are playing a role in driving recent A&D activity, particularly in the Marcellus. EQT spent $683 million on two dealsa
$513 million deal in West Virginia from TransEnergy and a
$170 million deal in Pennsylvania from Antero Resources.
Meanwhile, privately held Tug Hill took advantage of a bankruptcy buying opportunity to scoop up the West Virginia Appalachian assets of Stone Energy for $360 million.
East Texas and North Louisiana have also been popular
buying destinations for gas assets. Castleton Commodities International recently emerged as the $1.0 billion buyer of
Anadarkos prolific Carthage Field assets. With the Carthage
buy, Castleton picked up significant legacy Cotton Valley vertical production with the opportunity to leverage upside from
Haynesville and Bossier horizontal drilling.
While overall deal flow in Canada remained sluggish, the
country saw a number of notable deals. Tourmaline made a $1
billion plus acquisition in the Montney and Alberta Deep Basin from Shell, which has been systematically trimming its
global operations following the acquisition of BG Group. Unlike in the US, where activity is dominated by unconventionals, Canada also saw a number of significant conventional
deals focused on light oil assets in Saskatchewan.

Internationally, Siccar Point deployed capital received from


Blackstone and Bluewater Energy to acquire a portfolio of
North Sea assets on the UK Continental Shelf from OMV for
$875 million. Overall, private equity has played a much smaller role in international deal markets relative to the US, making
this a unique deal.
While the upstream space saw plenty of activity, the most
significant energy deal took place in oilfield services. After its
tie-up with Halliburton was scuttled, Baker Hughes found a
new dance partner in GE. The Boston-based conglomerate is
merging its oil and gas division with Baker Hughes in a deal it
values at $33.9 billion inclusive of net debt. Expected to close
in mid-2017, the merged assets will be placed in a new publicly
traded company owned 37.5% by existing shareholders of Baker Hughes and 62.5% by GE.
In the midstream space, gas transportation assets made up
the most notable deals. The largest midstream deal in this period was the Dominion Resources dropdown of Questar Pipeline to its MLP Dominion Midstream Partners for $1.7 billion
including cash, equity and assumed debt. At press time (Nov.
21), a blockbuster deal valued at $51 billion will likely take top
honors for the largest 2016 energy deal with Sunoco Logistics
acquiring Energy Transfer Partners, surpassing the prior highwater mark of the September 2016 $45 billion buy of Spectra
Energy by Enbridge.

SELECT INTERNATIONAL UPSTREAM TRANSACTIONS


Date
Announced

Buyer

Seller

Value
($MM)

Asset Location

Deal Type

17-Nov-16

Spartan Energy

ARC Resources

$522

Canada: Saskatchewan

Property

Oil

16-Nov-16

Genesis Energy

New Zealand Oil & Gas

$119

New Zealand

Property

Gas

16-Nov-16

Siccar Point Energy

OMV Group

$875

North Sea: UK

Acreage

Oil + Gas

14-Nov-16

Strata-X Energy

Magnum Gas & Power

$5

Botswana

Acreage

CBM

2-Nov-16

Tamarack Valley Energy

Spur Resources

$305

Canada: Saskatchewan

Corporate

Oil + Gas

31-Oct-16

Undisclosed

RMP Energy

$85

Canada: Alberta

Property

Oil + Gas

24-Oct-16

Cooper Energy

Santos

$62

Australia

Property

Gas

20-Oct-16

Tourmaline Oil

Shell

$1,037

Canada: Alberta

Corporate

Gas

Total

O/G

$3,010

SELECT GLOBAL OILFIELD SERVICES TRANSACTIONS


Date
Announced

Buyer

Seller

Value ($MM)

Asset Location

Deal Type

Asset Type

14-Nov-16

Rubicon Oilfield

Top-Co Holdings

Undisclosed

US: Texas

Corporate

Casing & Cementing


Integrated Services

31-Oct-16

GE Oil & Gas

Baker Hughes

$33,900

US: Diversified

Corporate

27-Oct-16

Fluid Delivery Solutions

Raging Bull Oilfield Services

Undisclosed

US: Texas

Corporate

Water Handling

26-Oct-16

National Oilwell Varco

Akastor

$145

Norway

Corporate

Production Services

17-Oct-16

Dril-Quip

TIW

$143

US: Texas

Corporate

Liner Hanger Sytems

Total

DECEMBER 2016

1612ogfj_53 53

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

$34,188

53

12/5/16 1:22 PM

INDUSTRY BRIEFS

CCI PAYS $1B FOR CERTAIN EAST TEXAS ASSETS


FROM ANADARKO PETROLEUM
Castleton Commodities International LLC (CCI) has acquired
the Carthage upstream and midstream assets in East Texas
from subsidiaries of Anadarko Petroleum Corp. for over $1
billion. Pro forma for the Carthage acquisition, CCI will own
over 160,000 net acres of leasehold in East Texas. As of the
effective date, daily net production to CCI in East Texas increased to over 320 MMcfe/d. JPMorgan Chase Bank NA acted
as Lead Arranger and Lead Bookrunner in connection with the
reserve based lending facility for this transaction. ABN AMRO
Capital USA LLC, Wells Fargo Securities, LLC, Socit Gnrale,
and Bank of America Merrill Lynch acted as Joint Lead Arrangers
and Joint Bookrunners. Funds managed by HPS Investment
Partners made an unsecured mezzanine debt investment in the
transaction. Socit Gnrale acted as Financial Advisor to CCI
for this transaction. Vinson & Elkins LLP and Bracewell LLP
served as legal advisors to CCI in the transaction. CCI is a global
commodities merchant with an integrated set of operations
consisting of physical and financial commodities trading and
the ownership, operation, and development of commoditiesrelated upstream and infrastructure assets.
CONCHO RESOURCES ACQUIRES
NORTHERN DELAWARE BASIN ASSETS
Concho Resources Inc. has reached a definitive agreement to
acquire approximately 24,000 gross (16,400 net) acres in the
northern Delaware Basin for approximately $430 million. The
acquired acreage is complementary to the companys leasehold
position in the northern Delaware Basin, with approximately
12,000 gross (10,000 net) acres located in the Red Hills area in
Lea County, New Mexico. The deal includes approximately 2.5
MBoepd (69% oil) of current production and expands the
companys position in the Red Hills area by more than 25% to
approximately 47,000 net acres. The acquisition more than
doubles the companys long-lateral drilling inventory in Red
Hills and enhances its ability to drill long laterals on existing
Concho leasehold. Consideration in the transaction includes
approximately $150 million of cash and 2.18 million shares of
Conchos common stock. Concho expects to fund the cash
portion of the transaction with cash on hand, borrowings under
its credit facility and potential non-core asset sales. The acquisition is expected to close in January 2017 and is subject to
customary closing conditions. As a result of the acquisition,
Concho plans to increase its operated rig count to an average
of eight rigs in the northern Delaware Basin during 2017. Concho
expects to grow oil production volumes by more than 20%
year-over-year in 2017 and total production by 18% to 21%, up
from the previously disclosed guidance range of 17% to 20%.
The company maintained its capital expenditure guidance of
$1.4 billion to $1.6 billion for 2017. Based on the current commodity price outlook, Concho expects to fund its 2017 capital
program within cash flow. The companys 2017 capital program
54

1612ogfj_54 54

excludes acquisitions and is subject to change depending upon


a number of factors, including commodity prices and industry
conditions.
MAGNETAR CAPITAL TO INVEST UP TO $450M
IN DOUBLE EAGLE ENERGY PERMIAN
Double Eagle Energy Permian LLC and Magnetar Capital have
entered into a definitive agreement wherein Magnetar has
agreed to invest up to $450 million of equity and delayed draw
unsecured debt capital to support additional Midland Basin
acquisition opportunities and to accelerate Double Eagle
Energy Permians operated drilling program. Double Eagle
Energy Permian LLC was formed through the combination of
Double Eagle Energy Lone Star LLC and Veritas Energy Partners
Holdings LLC. The company owns more than 60,000 core
Midland Basin net acres (over 70% operated) located in Midland,
Martin, Howard, Glasscock, Upton and Reagan counties. Vinson
& Elkins LLP acted as legal advisor and Jefferies LLC acted as
financial advisor to Double Eagle, and Kirkland & Ellis acted as
legal advisor and Bank of America Merrill Lynch acted as financial
advisor to Magnetar Capital.
SWIFT ENERGY TO SELL CERTAIN
SOUTHEAST LOUISIANA ASSETS
Swift Energy Co. has agreed to sell its Lake Washington field
in Southeast Louisiana. This divestiture is part of the companys
plan to focus on the Eagle Ford, where the company has identified over 400 high-quality drilling locations. Swift expects to
see a cash consideration of $40 million upon closing, which is
expected in early December 2016, subject to customary closing
conditions and adjustments. The assets include approximately
14,000 net acres in Plaquemines Parish, including 23 producing
wells, with net sales of approximately 1,160 barrels of oil equivalent per day (97% oil) as of the end of the third quarter 2016.
Upon closing of the transaction, Swift will also eliminate the
ARO liability associated with this asset from its books and records. Net proceeds are expected to help pay down the companys revolver.
EARTHSTONE ENERGY, BOLD ENERGY III COMBINE
TO FOCUS ON MIDLAND BASIN
Earthstone Energy Inc. and Bold Energy III LLC, a portfolio
company of EnCap Investments LP, have entered into a definitive
contribution agreement under which Earthstone will acquire
all of the outstanding membership interests of Bold, inclusive
of producing assets and undeveloped acreage, in an Up-C
transaction. Upon completion of the transaction, current Earthstone stockholders will own approximately 39% of the combined
company, and Bold members will own the remaining 61% on
a fully diluted basis. The transaction represents a transformational shift for Earthstone to a high-growth, Midland Basin-focused operating company. The existing Earthstone management
team, including President and CEO, Frank A. Lodzinski, will
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| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

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INDUSTRY BRIEFS

lead the combined company. The combined company will


maintain its headquarters in The Woodlands, Texas, and maintain an office in Midland, Texas. As of September 30, 2016, the
combined company had approximately $24.0 million of cash
on-hand and $17 million of bank debt drawn against a combined
$102 million reserve-based loan facility. Current production
from the combined company stands at approximately 7,400
Boepd (63% oil), consisting of 46% from the Midland Basin,
38% from the Eagle Ford, and 16% from the Bakken and other
areas. The transaction is further subject to the majority approval
of Earthstone stockholders, including a majority of disinterested
stockholders, as well as other customary approvals. Stephens
Inc. acted as independent financial advisor and provided a
fairness opinion to the special committee of the board of directors of Earthstone. Tudor, Pickering, Holt & Co. acted as
financial advisor to Bold. Legal advisors included Richards,
Layton & Finger for the special committee of the board of directors of Earthstone, Jones & Keller, P.C. for Earthstone, and
Latham & Watkins LLP for Bold.

RESOURCE CLOSES SAMSON RESOURCES ASSET BUY


Resource Energy Can-Am LLC has closed on its previously
announced agreement to acquire assets in the North Dakota
Bakken Formation from Samson Resources Company. The
purchase price was approximately $75.0 million (subject to
customary adjustments). The assets were sold pursuant to
Section 363 of the United States Bankruptcy Code. With the
acquisition, Resource Energy has now accumulated over 110,000
net acres in the Williston Basin and has proven reserves of
approximately 28 MMboe. Resource Energy has an interest in
more than 350 wells (approximately 50% operated), and has
current gross operated production of approximately 6,500
boe/d.
DRILLINGINFO ACQUIRES PRODUCT LINES, SERVICES
OF PONDEROSA ENERGY
Drillinginfo, an oil and gas analytics company, has acquired the
assets, product lines, and related services associated with
Ponderosa Energy, a division of Ponderosa Advisors LLC. Ponderosa Energy leverages proprietary databases and analytical
tools to provide customers with detailed market intelligence
for investment in crude oil, natural gas, and NGL markets. The
acquisition includes Ponderosa Energys production forecast
tools such as The Fundamental Edge, a subscription-based
market outlook service, and PRODcast, an online tool that allows
users to run forecast scenarios specific to their needs in real
time. The production forecast model allows users to better
understand 500+ break evens across the US and assess relative
economic advantages of specific producers based upon acreage, productivity, and cost. Ponderosa Advisors President and
CEO, Porter Bennett, will join Drillinginfos board of directors.
The addition of Ponderosas products and services follows
closely behind Drillinginfos recent acquisition of GlobalView
DECEMBER 2016

1612ogfj_55 55

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

and its flagship product, MarketView, which allows companies


across the energy supply chain, risk marketers, and other commodities investors to monitor price movements. Energy employees will join the Drillinginfo office in Littleton, CO.
NAVIGANT ACQUIRES ECOFYS
Navigant, a professional services firm, has acquired Ecofys, an
international consultancy based in Europe with a position in
the fields of energy and sustainability. The addition of 150
Ecofys consulting professionals enhances Navigants capabilities
and solution offerings, providing additional expertise in the
areas of energy policy, climate strategies and policies, energy
systems and markets, urban energy, and sustainability
services.
RUBICON OILFIELD ACQUIRES TOP-CO HOLDINGS
Houston, TX-based Rubicon Oilfield International has acquired
Top-Co Holdings Inc., a supplier of oilfield casing, cementing
and completion products. Terms of the transaction were not
disclosed. Backed by a capital commitment from Warburg
Pincus, Rubicon will invest in the accelerated growth of all TopCo product lines.
DRIL-QUIP COMPLETES TIW ACQUISITION
Dril-Quip Inc. has completed its previously announced acquisition of TIW Corp.TIW, based in Houston, Texas, is a global
provider of liner hanger systems and related equipment and
services. Dril-Quip is a manufacturer of offshore drilling and
production equipment used in deepwater, harsh environment,
and severe service applications.
GASTAR COMPLETES INITIAL CLOSING
OF OKLAHOMA ACREAGE SALE
Gastar Exploration Inc. has completed the initial closing of the
sale of certain non-core assets located in northeast Canadian
and southeast Kingfisher counties, Oklahoma. Gastar received
$46.4 million in the initial closing and the buyer has placed an
additional $28.3 million into escrow. Release of escrow funds
to Gastar is subject to certain title curative and other conditions.
Additionally, Gastars regularly scheduled November 2016 revolving credit facility borrowing base redetermination resulted
in a current borrowing base of $85 million, down from $100
million. Gastar will repay the required $15 million borrowing
base reduction from proceeds of the initial closing of the noncore acreage sale. The next regularly scheduled borrowing
base redetermination is to occur in May 2017. In a note following
the close, Wunderlich Securities analysts commented: We
believe GST has done a nice job over the past year in positioning
itself financially and operationally to take advantage of its
opportunities in the STACK; with the non-core sales, drilling
agreement, and increase in activity of late, we think GST is in
a good position to drive growth. Further, we believe that now
the focus can be on GSTs drilling activity with well results being
55

12/5/16 1:22 PM

INDUSTRY BRIEFS

what can help define its STACK position, the economics, and
potential in the play.
MAVERICK DRILLING & EXPLORATION CHANGES
NAME
Maverick Drilling & Exploration Ltd. has received shareowner
approval to change its corporate name to Freedom Oil & Gas
Ltd., effective November 7, 2016. The companys common
stock will trade on the Australian Stock Exchange under the
new trading symbol FDM beginning on November 10, and
in the US on the OTCQX under the symbol FDMQF beginning on November 14. Changing our name to Freedom Oil
& Gas formalizes a close out of the past activities of the
company and its history. We have transitioned from being a
drilling contractor and small producer to an early stage development-focused, E&P company, stated J. Michael Yeager,
chairman and CEO. Going forward, the company plans to
develop acreage acquired in the Eagle Ford Shale.
NYSE ACCEPTS BASIC ENERGYS
CONTINUED LISTING PLAN
The New York Stock Exchange has accepted Basic Energy
Services Inc.s plan for continued listing on the NYSE. As a
result, Basics common stock will continue to be listed on the
NYSE, subject to quarterly reviews by the NYSE to monitor
the companys progress against the plan to restore compliance
with continued listing standards. The NYSE had notified Basic
on August 19, 2016 of non-compliance with the market capitalization and share price continued listing standards. Basic
has a period of six months from the date of the NYSE Notice
to regain compliance with the minimum share price criteria
by bringing its share price and thirty trading-day average
share price above $1.00. Basic has also a period of 18 months
from the date of the NYSE Notice to regain compliance with
the market capitalization requirements of the NYSE listing
standards. Should the companys average global market
capitalization over a consecutive 30 trading-day period fall
below $15 million, the NYSE will promptly initiate suspension
and delisting procedures.
WELLDOG PLANS JV TO DEVELOP CBM
FIELDS WITH SHAANXI ENERGY INSTITUTE
WellDog, an energy-focused technical services company, has
signed a Letter of Intent to form a joint venture with the
Shaanxi Provincial Institute of Energy Resources and Chemical
Engineering (SPIERCE). The joint venture will deploy reservoir,
production and development technologies to demonstrate
profitable coal bed methane (CBM) development in fields
located within the Shaanxi province, one of Chinas most
prolific energy resource regions. Chinas CBM resource is
estimated at nearly 40 trillion cubic meters (tcm), with recoverable reserves of about 10 tcm. Over the last few decades,
China has dramatically increased investment in CBM technol56

1612ogfj_56 56

ogies, and each of the countrys five-year plans has increased


CBM production targets, but the results to date have failed
to meet those goals. Since 1999, WellDog has focused on
providing cost effective, reliable, accurate subsurface data
and data collection systems to high volume resource production operators such as shale oil and gas, coalbed methane,
and coal mining operators.

PETROQUEST ENERGY ENTERS EAST TEXAS JV


PetroQuest Energy Inc. has entered into East Texas joint
venture agreements to develop the Cotton Valley formation
with a group of investors (the partners), whereby the partners
acquired an approximate 20% working interest in the companys 6,400 gross acre project area. The joint venture does not
include existing vertical and horizontal producing wells within
the defined project area. The partners will pay approximately
$12 million in participation fees over the first 12 months of
the program (subject to a one-time partner election to continue
participating in the program after the 7th well) to fund a
portion of the companys development costs. In addition, the
partners will pay approximately 24% of the drilling and completion costs relative to their 20% working interest. The first
phase of the joint venture is focused on drilling up to 47
horizontal Cotton Valley wells with an expected average lateral
length of approximately 5,600 feet. PetroQuest recently executed a rig contract and expects to spud its first joint venture
horizontal Cotton Valley well in December of 2016. Based on
the existing partner participation described above, the company expects to pay approximately 69% of the drilling and
completion costs for a 75% working interest in the initial joint
venture well. PetroQuest expects to drill and complete 8-10
gross wells during 2017 under this joint venture.
ORDER IN WESTERNGECO V. ION GEOPHYSICAL
PATENT INFRINGEMENT LAWSUIT
On November 14, 2016, a trial court issued an order in the
previously-reported lawsuit of WesternGeco LLC v. ION Geophysical Corp. that reduced the amount of the appeal bond
from $120 million to $65 million, ordered the sureties to pay
principal and interest on the royalty previously awarded in the
amount of approximately $22 million and declined to issue a
final judgment until after consideration of whether enhanced
damages should be awarded in the case. Brian Hanson, IONs
CEO, commented, While we were disappointed with the
unusual decision by the trial court ordering the sureties to
pay the royalty damages and interest without a final judgment,
we intend to respect the trial courts decision by transferring
up to $22 million to WesternGeco in lieu of having WesternGeco exercise its remedies against the sureties. It comes at a
time where we have both right sized our business and built
sufficient liquidity of approximately $80 million to both fund
this payment and support normal business operations. This
seven-year-old lawsuit has been a hangover to IONs shareWWW.OGFJ.COM

| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

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INDUSTRY BRIEFS

holders far too long and we are looking forward to putting


the potential risk of this payment behind us so we can focus
on running our business and creating shareholder value
through a very difficult time in the industry. The relationship
between ION and WesternGeco has never been stronger as
we both collaborate on projects and support them as a customer of ION. The value of this relationship far diminishes the
$22 million payment and I look forward to a strong future
working relationship together.
EMERALD OIL EMERGES FROM BANKRUPTCY
WITH NEW NAME
Emerald Oil Inc. and its subsidiaries completed a Section 363
sale process and emerged from Chapter 11 bankruptcy protection as a debt-free entity. The company officially concluded
its Section 363 process after completing all required actions
and satisfying the conditions of its bankruptcy sale plan, which
was confirmed by the US Bankruptcy Court for the District of
Delaware by order dated November 1, 2016. The company
reduced its long-term debt by approximately $278 million.
Going forward, the company, majority owned by Crestline
Investors and Fir Tree Partners, will operate under the new
name National Oil Production Company LLC. The Denver,
CO-based operator is focused on producing oil and gas wells
and developing oil and gas leasehold in the Williston Basin
of North Dakota, targeting the Bakken and Three Forks shale
oil formations and Pronghorn sand oil formation.
ECOPETROL SETS 2017 INVESTMENT PLAN
Ecopetrol SA has approved an investment plan of approximately US$3.5 billion for 2017. This plan allocates more than
80% (nearly US$2.85 billion) to profitable exploration and
production projects. Exploration and production projects will
largely focus on developing key production assets and identifying Colombian onshore and offshore resources, and maintaining the companys position in foreign assets. More than
95% of investments will be made in Colombia, with the remainder made abroad. Investment in exploration will be increased from US$282 million in 2016 to US$650 million in 2017.
The Ecopetrol Group expects to continue to produce an
average of about 715 thousand barrels of oil equivalent per
day during 2017. The company expectes to increase production
by 2020 to between 760 and 830 thousand barrels of oil
equivalent per day, depending on international crude oil
prices.
ULTRA PETROLEUM ENTERS PSA
WITH SHAREHOLDERS, SENIOR NOTEHOLDERS
Ultra Petroleum Corp. has entered into a Plan Support Agreement dated November 21, 2016 and a Backstop Commitment
Agreement dated November 21, 2016 with (i) holders of a
substantial majority of the principal amount of its outstanding
5.750% Senior Notes due 2018 and 6.125% Senior Notes due
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2024 and (ii) shareholders who own at least a majority of its


outstanding common stock or the economic interests therein.
On April 29, 2016, UPL and each of its subsidiaries filed voluntary petitions seeking in-court reorganization under Chapter
11 of the US Bankruptcy Code. The PSA sets forth the terms
and conditions pursuant to which the Ultra Entities and the
Commitment Parties have agreed to seek and support a joint
plan of reorganization at an aggregate plan value of $6.25
billion, $6 billion, or $5.5 billion, depending on commodity
prices, for the Ultra Entities which will successfully complete
the Reorganization Proceedings. The Backstop Agreement
sets forth the terms and conditions under which the Commitment Parties have agreed to fund a $580 million offering of
rights to purchase shares of common stock in reorganized
UPL in connection with the Plan. Under the Plan, the total
enterprise value of the Ultra Entities will be $6 billion; provided,
that if the average closing price of the 12-month forward Henry
Hub natural gas strip price during the seven trading days
preceding the commencement of the Rights Offering solicitation is: (i) greater than $3.65/MMBtu, the Plan Value will be
$6.25 billion; or (ii) less than $3.25/MMBtu, the Plan Value will
be $5.5 billion. Among other matters, the Plan provides for a
comprehensive restructuring of all allowable claims against
and interests in the Ultra Entities, including the conversion of
the outstanding unsecured senior notes issued by UPL to
newly-issued shares of common stock in UPL, the exchange
of the outstanding unsecured senior notes issued by UPLs
subsidiary Ultra Resources Inc. for new unsecured notes issued
by Ultra Resources and cash, and the payment in full of all
other allowed claims against the Ultra Entities in cash.
BP, GE LAUNCH OFFSHORE DIGITAL TECHNOLOGY
Together, BP and GE have launched Plant Operations Advisor
(POA), a new digital solution designed to improve the efficiency, reliability and safety of BPs oil and gas production
operations. Plant Operations Advisor is already helping BP
manage the performance of one of its platforms in the Gulf
of Mexico and, subject to a successful pilot, it will be deployed
next year to other BP facilities around the world. The tool,
built on GEs Predix operating system, was created as part of
a development partnership the two companies announced
in January. Using GEs Predix and Asset Performance Management (APM) capabilities, POA rapidly integrates operational data from producing oil and gas facilities to deliver
notifications and analytical reports to engineers. The system
provides simplified access to a variety of live data feeds and
includes visualization capabilities including a real-time facility
threat display. It also incorporates an extensive case management capability to support learnings from prior operational
issues. GE intends to offer this technology, which combines
big data, cloud hosting, and analytics on both individual pieces
of equipment as well as the entire production system, as an
APM solution that will be available to the industry.
57

12/5/16 1:22 PM

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1612ogfj_58 58

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ENERGY PLAYERS

ORTWEIN NAMED PRESIDENT


OF XTO ENERGY
Sara N. Ortwein, previously president of ExxonMobil
Upstream Research Company, is now president of
XTO Energy. Ortwein transitioned into the Fort Worth,
TX-based role in November. Ortwein earned a bachelors degree from the University of Texas at Austin
before joining Exxon in 1980 as a drilling engineer.
Within the Exxon family of companies, she has served
as a reservoir evaluation and planning manager, spent
time as a corporate upstream advisor to senior management, worked as production manager for ExxonMobils operated US production operations and
served as vice president of engineering for ExxonMobil Development Company.
DELOITTE ADMITS KOEPPEN AS PRINCIPAL
Mark Koeppen has been admitted as a principal
within Deloitte Consultings CFO strategy practice.
As the leader for the firms national Oil & Gas (O&G)
finance practice, Koeppen oversees the firms investments in its oil and gas digital finance practice and
steers delivery for financial planning, budgeting and
predictive analytics in oil and gas. Koeppen has led
successful projects and client relationships at some
of the largest energy companies during his 10-year
career with Deloitte.
UPTON JOINS SQUIRE PATTON BOGGS
Squire Patton Boggs has appointed Neil Upton to
its global Energy & Natural Resources Practice Group
in London. Upton joins the firm as partner, along with
a legal and business development team, from King
& Wood Mallesons in London, where he was the UK
and Europe head, and global co-head, of the energy
and infrastructure and project finance practice. Uptons global practice is focused on advising utilities,
banks and other financial institutions, governments
and NGOs on all aspects of the energy business,
including the structuring, development and financing
of projects, M&A, trading issues, privatization, market
entry and regulatory matters. His expertise extends
across sectors including power generation (both conventional and renewable), oil gas and LNG (liquefied
natural gas), transmission and supply. Joining Upton
in London are Sushma Maharaj, a senior energy lawyer
with oil, gas, LNG and electricity
BLUEKNIGHT ENERGY PARTNERS NAMES
KANVIK AS GENERAL COUNSEL
Blueknight Energy Partners LP has named Joel Kanvik
as general counsel replacing Chris Paul after his three
years of service. Kanvik brings more than 20 years of
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OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

experience to the organization, including 15 years at


Enbridge Energy Company Inc. Kanvik has experience
in corporate law as well as private practice. He most
recently served as the Director US Law and Assistant
Secretary for Enbridge Energy Company Inc. in Duluth,
Minn. Prior, he was in a private practice at LaRowe,
Gerlach & Roy, S.C., in Madison, Wisc. Kanvik received
a bachelors degree from Northwestern University
and a JD from University of Wisconsin Law School.
HARTUNG JOINS EY US OIL & GAS PRACTICE
John Hartung has joined EY as a Houston-based oil
and gas principal. He will also serve as Americas Oil
& Gas Leader for Parthenon-EY, part of EYs global
Transaction Advisory Services practice. Hartung joins
EY from global consultancy Boston Consulting Group.
Over the past 16 years, he has served in partner roles
and been actively involved in the energy practices at
both the Boston Consulting Group and McKinsey &
Company. His primary expertise resides in the downstream segment of the oil and gas industry, but he
has served clients on strategy and functional topics
across the value chain including upstream, midstream,
and commercial and trading operations. Hartung
began his career at Mobil and ExxonMobil where he
spent 10 years in a number of strategy and management roles.
HAM JOINS OPPORTUNE
AS MANAGING DIRECTOR
Jeremy Ham has joined Opportune LLP, an international energy consulting firm, as a managing director
in the firms Strategy and Organization practice. Based
in Houston, Ham will focus on developing and executing strategic solutions designed to lower transaction costs and mitigate risks. He joins Opportune with
extensive energy industry experience in mergers and
acquisitions, evaluation and integration, deal structuring and negotiations, capital raising, strategic
planning and business development. He previously
served as executive vice president at NuDevco Midstream Partners LLC, where he led strategic transactions and business development. He also held roles
as vice president of strategy and business development at Marlin Midstream Partners LP.
WEATHERFORD FOUNDER RESIGNS CEO POST
Weatherford International plc has named Robert
Rayne as chairman and Krishna Shivram as interim
CEO following the departure of Bernard J. Duroc-Danner in early November. Duroc-Danner previously
served as chairman, president, and CEO. Rayne previously served as vice chairman of the board. Shivram

Ortwein

Koeppen

Upton

Kanvik

Hartung

Ham

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ENERGY PLAYERS

will continue as CFO until a successor is named. Shivram was


appointed executive vice president and CFO of the company
in November 2013. He has over 25 years of financial and operational management experience in the oilfield service industry
and previously worked for Schlumberger Ltd. in a variety of
roles across the globe. The company board of directors has
named Dr. Bernard J. Duroc-Danner as Chairman Emeritus. In
a statement, the company notes that Duroc-Danner will not
receive any remuneration for the honorary and advisory role
to the board.
PARAGON OFFSHORE NAMES INTERIM CEO, CFO
Paragon Offshore plc has appointed Dean E. Taylor, a director
of the company since its founding in 2014, to serve as interim
president and CEO. Lee M. Ahlstrom, currently the companys
senior vice president of investor relations, strategy, and planning, was named interim CFO. Taylor and Ahlstrom succeed
Randall D. Stilley and Steven A. Manz, who are no longer with
the company. Stilley is no longer a member of the Paragon
Board of Directors. Taylor has served as a member of Paragons
Board of Directors and as the chairperson of Paragons Nominating and Corporate Governance Committee since 2014. He
previously served in a variety of roles at Tidewater Inc. from
1978 through 2012, including CEO and chairman of the board.
Ahlstrom has more than 20 years of experience in the oil and
gas industry. Prior to his role at Paragon, he served as senior
vice president strategic development and vice president of
investor relations and planning of Noble Corp.
HUSKY ENERGY CEO TO RETIRE
Husky Energys president and CEO, Asim Ghosh, will retire
effective December 5, 2016. Ghosh will remain on the Board
of Directors. Ghosh has been with Husky Energy for seven
years. Rob Peabody, Huskys COO since 2006, has been appointed president and CEO and will join the Board of Directors
effective December 5, 2016. Peabody started his career in
Canada and has worked internationally with leadership roles
in every segment of the business, including senior positions
in exploration and production, midstream and downstream.
PEAKES JOINS NOBLE AS SVP, CFO
Noble Corp. plc has named Adam C. Peakes senior vice president and CFO, effective January 23, 2017. Peakes will oversee
corporate finance, financial reporting, accounting, tax and
treasury activities at the ccompany. Since 2011, Peakes has
served as managing director and Head of OFS Investment
Banking at Tudor, Pickering, Holt & Company. From 2000
2011, he served in various roles at Goldman Sachs & Company,
most recently as managing director, Global Natural Resources
Investment Banking Division. Peakes received his undergraduate degree from Rice University in 1995 and an MBA from
Harvard University in 2000.

60

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EXCO NAMES FARQUHARSON ACTING CFO


EXCO Resources Inc. has made changes to its management
team. Tyler Farquharson, EXCOs current vice president of
strategic planning, became EXCOs acting CFO and treasurer
on November 2, 2016 following the departure of Chris Peracchi,
EXCOs former vice president, acting CFO and treasurer. Farquharson will continue to serve as EXCOs vice president of
strategic planning and lead the investor relations function.
Farquharson has been with the company for 11 years. Peracchi
became EXCOs treasurer and director of finance and investor
relations in May 2013 and became its vice president of finance
and investor relations in September 2014. He was named vice
president and acting CFO in late August following the departure of Richard A. Burnett, EXCOs former vice president and
CFO. Burnett left EXCO to pursue another opportunity.
TESCO NAMES GATLIN SVP, COO
Tesco Corp. has named John Gatlin as senior vice president
and COO, effective immediately. In this role, Gatlin will lead
both the Products and Tubular Services segments and be
responsible for Tescos QHSE, global manufacturing and supply
chain management. He will report directly to Fernando Assing,
Tescos president and CEO. Gatlin has 20 years of experience
in the energy services and consulting businesses. He joins
Tesco from a position as senior advisor to the chairman of
Chemeor Inc. and previously served as Chemeors president
and CEO from April 2014 to April 2016. Earlier, Gatlin held
several management roles with National Oilwell Varco, most
recently as president of the Pressure Pumping Equipment
division. Gatlin holds a bachelors degree from the University
of Texas at Austin and earned his MBA from the Wharton
School at the University of Pennsylvania.
WESTNEY ELECTED TO NAC
The National Academy of Construction (NAC) has elected
Richard E. Westney, Founder and Director of Westney Consulting Group Inc., as a member of its 2016 class. He was inducted October 20. The 2016 class includes 30 new inductees.
Three hundred industry leaders were considered for the NACs
rigorous nomination and election process. Westney has developed new strategic project planning concepts and conducted workshops worldwide. His clients include major oil
companies, national oil companies, drilling and production
service providers, contractors, and project investors. He is the
author or co-author of five books on project management,
cost, and risk. He has served as visiting faculty for executive
programs at Stanford, The University of Texas at Austin, Texas
A&M University, the University of Houston, the Norwegian
University of Science and Technology, and the Moscow School
of Management. He holds a bachelors degree in mechanical
engineering from City College of New York and a masters
degree in management science from Rensselaer Polytechnic
Institute.
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| OIL & GAS FINANCIAL JOURNAL

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ENERGY PLAYERS

OLEARY JOINS MANAGEMENT TEAM


AT VENTURE GLOBAL LNG
Venture Global LNG Inc. has hired John Brian OLeary as senior
vice president of operations. Before joining Venture Global,
OLeary acted as the COO of Cameron LNG, where he led the
pre-operations planning for commissioning and operation of
three trains of LNG (4.5 MTPA each). OLeary has over 25 years
of experience with ExxonMobil in the areas of pre-operations,
planning and commissioning of LNG terminals. Venture Global
continues its development plans for the 10 MTPA Venture
Global Calcasieu Pass facility on an approximately 1,000-acre
site located at the intersection of the Calcasieu Ship Channel
and the Gulf of Mexico, and the 20 MTPA Venture Global
Plaquemines LNG facility in Plaquemines Parish, Louisiana on
an approximately 630-acre site at river mile marker 55 on the
Mississippi River, located 30 miles south of New Orleans,
Louisiana.
BACON JOINS KIRKLAND & ELLIS
AS CORPORATE PARTNER IN HOUSTON
Doug Bacon has joined Kirkland & Ellis LLP as a corporate
partner in the Houston office. Bacon advises private equity
firms, companies and corporations on complex multinational
mergers and acquisitions, many of which involve carve-out
acquisitions and sales. Bacon joins Kirkland from the New York
office of Freshfields Bruckhaus Deringer LLP, where he was a
partner. Prior to Freshfields, he was an associate at Simpson
Thacher & Bartlett LLP. Bacon holds a JD from the University
of Virginia School of Law, and a bachelors degree, magna cum
laude, from Baylor University.
DUFF & PHELPS NAMES BELL SENIOR ADVISOR
Graeme Bell has joined Duff & Phelps as a senior advisor to
the firms Corporate Finance Advisory practice, with a focus
on the oil and gas industry. Based in Aberdeen, Bell offers
expertise and insight into the North Sea Fields to support the
firms global oil and gas M&A business. Bell has 20 years of
energy experience with C-suite roles at Viking SeaTech, Green
Ocean Energy, Nautronix, and JDR Cable Systems. He is also
the founder of, and current managing director at Bell & Associates Ltd., which provides a full range of management and
financial advisoryservices. He holds a degree from McMaster
University, as well as a post-graduate diploma in accounting
from the University of Strathclyde. He also holds two non-executive director roles in the oil and gas industry.
7 MILE ADVISORS NAMES CHURMAN AS DIRECTOR
7 Mile Advisors, a middle-market investment banking firm
focused on business services and technology, has named Neil
Churman as director and head of the firms Infrastructure &
Energy Services practice. With nearly 10 years of experience
focusing on the architecture, engineering, and environmental
consulting (AEC) industries, Churman will be located in the
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OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

firms Houston office and lead all facets of the firms expanding
presence in infrastructure and energy services sectors. Previously, Churman served as a principal consultant at Morrissey
Goodale, a consulting and advisory firm, where he advised
AEC clients on M&A and corporate strategy.
PACIFIC EXPLORATION & PRODUCTION
NAMES McALLISTER CFO
Following a restructuring, Pacific Exploration & Production
Corp., a Canadian-based explorer and producer of natural gas
and crude oil, has named Columbian oil and gas executive
Camilo McAllister as CFO. Jim Latimer, previously the chief
restructuring officer at Pacific, will be appointed interim president and CEO while the board, assisted by executive search
firm Spencer Stuart, completes the process to select a permanent replacement. Pacific has implemented a strategy to narrow
its geographic focus to Colombia and Peru. The company sold
its Brazilian assets and suspended its expansion into
Mexico.
32 DEGREES CAPITAL APPOINTS MANAGING PARTNER
32 Degrees Capital has named Trent Baker as a managing
partner. Baker will lead the deal team in sourcing, due diligence,
and investment monitoring. Baker has been with the firm for
nine years in progressively senior roles encompassing various
aspects of portfolio management and firm operations. Founded
in 2004, 32 Degrees Capital is an oil and gas focused private
equity firm based in Calgary, Canada.
BNK PETROLEUM APPOINTS
NEUHAUSER AS DIRECTOR
BNK Petroleum Inc. has named David Neuhauser as a new
director of the company. Neuhauser is founder and managing
director of Livermore Partners based in the Chicago suburb
of Northbrook, Illinois.Livermore Partners LLC is a private
investment firm serving institutions, high-net worth individuals
and private equity sponsors. Neuhauser has extensive experience in capital markets and M&A activity and has over 20
years of experience in strategic investments including oil and
gas. Prior to founding Livermore, Neuhauser was founder and
president of Loren Holdings Inc., a company focused on strategic investments across a broad group of industries. Neuhauser
received his BA with concentrations in Economics from Northeastern Illinois University and has conducted Graduate studies
in Economics and Sociology from Roosevelt University of
Chicago. He is a current board member of TSX Venture Exchange listed Mitra Energy Inc.
INDUSTRY VETERANS JOIN AMPHORA TEAM
Amphora Inc., a global provider of commodity trading and
risk management software solutions, has made additions to
its team in both the US and Europe. Joining Amphoras London
office are Neil Sanghrajka as Head of Professional Services
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ENERGY PLAYERS

EMEA/APAC and Mark Valentine as Senior Pre-Sales Consultant. Sanghrajka joins Amphora from Allegro Development
where he was Director of Professional Services in EMEA. Before
joining Allegro, he had similar responsibilities at SunGard
Energy and originally came from the management consultancy
industry. Valentine joins Amphora following many years at
OpenLink and before that SolArc, where he helped start the
companys international business. Joining Amphoras Houston
office are Celia Dyer and Rachel Lowe. Prior to Amphora, Dyer
was a Product Manager at both Calypso Technology and Triple
Point Technology. Lowe joins from Lyland Associates, a consultancy she founded that focused on energy trading and risk
management and business process re-allignment.
SINOCHEM NAMES NEW PRESIDENT
In early November, China appointed Zhang Wei as president
of Sinochem Group. The appointment was decided by relevant
government departments.
HUTCHINGS ASSUMES CHAIRMANSHIP OF OKOGA
At the recent one-day annual meeting of The Oklahoma Oil
and Gas Association in Oklahoma City, OK, association members elected Wade Hutchings as chairman. Hutchings, who
serves as regional vice president of Mid-Continent Assets for
Marathon Oil, succeeds Rand Phipps, who had served as
OKOGA chairman since 2007. Phipps serves as senior vice
president, secretary, general counsel and COO of Mustang
Fuel Corp. He will remain on the board of directors.
ENERGY NAVIGATOR ENGINEER NAMED TO SPE
DISTINGUISHED LECTURER LINE-UP
Randy Freeborn, chief research engineer with Energy Navigator,
has been asked to share his expertise in Type Well creation
with international audiences as an SPE Distinguished Lecturer
for 2016-17. Freeborn is a petroleum engineer with over 40
years of experience. Every year, SPE (The Society of Petroleum
Engineers the largest individual-member organization serving
upstream oil and gas managers, engineers, scientists, and
other professionals worldwide) selects a group of experts to
share their expertise with Society members through lectures
given at local SPE section meetings. The lectures cover a variety
of critical topics for the energy industry.
PETROFAC NAMES NEW CFO
Alastair Cochran joined Petrofac Ltd., the international oil and
gas facilities service provider, in October, formally suceeding
Tim Weller as the companys CFO and executive director.
Weller left the group in October to take up the role of CFO
of G4S plc. Alastair joined Petrofac from BG Group plc, where
he was most recently Transition Head of BG Global Strategy
& Business Development overseeing the integration of BG
Group following its acquisition by Royal Dutch Shell plc. Prior
to that Alastair was Group Head of M&A and Corporate Finance
62

1612ogfj_62 62

at BG Group.Chartered Accountant Alastair, who has 25 years


experience, began his career with KPMG and spent his earlier
career in investment banking, including with Morgan Stanley
and Credit Suisse, advising on a wide range of capital market
and M&A transactions.

SANTOS APPOINTS CFO


Australian oil and gas producer Santos Ltd. appointed Anthony
Neilson as its new CFO. Neilson is a Chartered Accountant
with significant experience in the oil and gas sector within the
United Kingdom, China, South East Asia and Australia. He
currently serves as CEO of Roc Oil Co. Ltd., which was acquired
in 2014 by Hong Kong-listed investor Fosun International Ltd.
Previously, Neilson was CFO of ROC and has held commercial,
finance and business services roles at Caltex Australia, Credit
Suisse First Boston and Arthur Andersen. Neilson holds a
Masters of Business Administration from AGSM and is a Fellow
of the Financial Services Institute of Australasia and a Member
of Chartered Accountants Australia and New Zealand. Neilson
is expected to commence duties with Santos in December
2016. Current CFO Andrew Seaton, who will retire from Santos,
remains with the company until the transition is complete.
OHH APPOINTS RACHAL AS PRESIDENT
Oilfield Helping Hands (OHH), a nonprofit charitable organization comprised of volunteers devoted to providing financial
assistance to oilfield workers in financial crisis, has appointed
Gregory Rachal as president. Since it was founded in 2003,
OHH has raised more than $3.3 million for more than 300
families affected by financial hardships. Rachal has extensive
experience in drilling fluids, previously holding positions with
M-I SWACO and Halliburton in sales, product line and account
management, operations and project management across the
US and working with major and independent operators in the
Houston and New Orleans markets. He holds a bachelor of
science degree in industrial art from Northwestern State University, Natchitoches, La., and post-graduate qualifications in
management and computer science from Tulane University,
New Orleans, La.
STATON SUCCEEDS MORRIS
AS SOUTHERN STAR PRESIDENT, CEO
Southern Star Central Gas Pipeline Inc. has appointed Jimmy
D. Staton as president and CEO, effective December 5, 2016.
Jerry L. Morris, Southern Stars past president and CEO, has
assumed the role of president and CEO Emeritus until his retirement in early 2017. Morris announced his retirement after
39 years of service. Most recently, Staton served as executive
vice president and member of the board of directors of Venture
Global LNG. Prior, he served as CEO of the Columbia Pipeline
Group, Northern Indiana Public Service Company and the
Columbia Distribution Companies. He graduated from Louisiana
State University with a degree in Petroleum Engineering.
WWW.OGFJ.COM

| OIL & GAS FINANCIAL JOURNAL

DECEMBER 2016

12/5/16 1:23 PM

Companies mentioned in this issue of Oil & Gas Financial Journal are listed in
alphabetical order with advertisers in boldface type. The index is provided as
a service. The publisher does not assume any liability for errors or omission.

COMPANY

PAGE

32 Degrees Capital
7 Mile Advisors
ABV AMRO Capital USA LLC
Aker BP
Allegro Development
American Petroleum Institute
Amphora Inc.
Anadarko
Anadarko Petroleum
Antero Resources
Arthur Andersen
Australian Stock Exchange
Bain & Co.
Baker Hughes
Bank of America Merrill Lynch
Basic Energy Services Inc.
BBVA Securities Inc.
Bell & Associates Ltd.
Bentek Energy
BG Group
Bill Barrett
Black Stone Minerals Co. LP
Blackstone
Blueknight Energy Partners LP

61
61
54
12
61
48
61
53
20,41,54
53
62
56
42
41,53
54
56
16
61
32
53,62
20
15
53
59

BLUEROCK ENERGY CAPITAL

IFC

Bluewater Energy
BNK Petroleum Inc.
BNP Paribas Securities Corp.
Bold Energy III LLC
Boston Consulting Group
BP
Bracewell LLP
Brigham
Burlington Resources
C&J Energy Services
CaixaBank
Caltex Australia
Calypso Technology
Cameron LNG
Capital One Securities
Castleton Commodities
International LLC
Catalyst Partners LLC
Centennial
Chemeor Inc.
Chevron
Clayton Williams Energy
Cleco
CNOOC
Columbia Pipeline Group
Comision Federal de Electricidad
Concho Resources Inc.
ConocoPhillips
Continental Resources
Credit Suisse First Boston
Crestline Investors
Deloitte
Devon
DNB markets Inc.
DOJ
Dominion Midstream Partners
Dominion Resources
Dominion Transmission Inc.
Double Eagle Energy Lone Star LLC
Double Eagle Energy Permian LLC
Douglas-Westwood
Drillinginfo

DECEMBER 2016

1612ogfj_63 63

53
61
16
55
59
41,57
18,54
51
26
51
16
62
62
60
15
53,54
15
51
60
11,40
52
51
51
62
16
54
11,26
20,26
62
56
59
51
16
49
16,53
53
32
54
54
40
55

COMPANY
Dril-Quip Inc.
Duff & Phelps
Earthstone Energy Inc.
Ecofys
Ecopetrol SA
El Paso Exploration
El Paso Pipeline Partners
Emerald Oil Inc.
Enbridge
Encana
EnCap Investments LP
Energy Navigator
Energy Transfer Partners
Energy Ventures
ENERGYNET

COMPANY/ADVERTISER INDEX
PAGE
55
61
55
55
57
26
51
56
53,59
51
55
62
14,53
10
13

Ensco
EPA
EQT
Evaluate Energy
Evercore Group LLC
Evercore ISI
EXCO Resources Inc.
Extraction Oil & Gas
ExxonMobil
EY
Felix
FERC
Fir Tree Partners

11
18
32,53
6
16
11
60
51
14,59
59
51
14,32
56

FLOTEK INDUSTRIES

IBC

Fosun International Ltd.


62
Freedom Oil & Gas Ltd.
56
Freshfields Bruckhaus Deringer LLP
61
G4S plc
62
Gastar Exploration Inc.
55
GE
53,57
Genoil Inc.
15
Genscape
30
Goldman Sachs & Company
51,60
Green Ocean Energy
61
Grozneft
15
Grupo CLISA
16
Halliburton
53,62
HEP
16
Holland & Knight LLP
48
Howard Midstream Energy Partners LLC 16
HPS Investment Partners
54
Husky Energy
60
IAM Legacy
44
Inpex
41
ION Geophysical Corp.
57
JDR Cable Systems
61
Jefferies LLC
54
Jones & Keller PC
55
JP Morgan Securities LLC
16
JPMorgan Chase Bank NA
54
Kinder Morgan
51
King & Wood Mallesons
59
Kirkland & Ellis LLP
54,61
Kodiak Oil & Gas
52
LaRowe, Gerlach & Roy SC
59
Latham & Watkins LLP
11,16
Livermore Partners LLC
61
Loren Holdings Inc.
61
Lundin Norway
12
Lyland Associates
62
Magellan Midstream Partners LP
14
Magnetar Capital
54

OIL & GAS FINANCIAL JOURNAL | WWW.OGFJ.COM

COMPANY

PAGE

Maquarie
Marathon Oil
Marlin Midstream Partners LP
Maverick Drilling & Exploration Ltd.
Mayer Brown
McKinsey & Company
Merrill Lynch
M-I SWACO
Milbank, Tweed, Hadley & McCloy LLP
Mitra Energy Inc.
Morgan Stanley
Morrissey Goodale
MUFG
Mustang Fuel Corp.
Nabors
NAC
National Oil Production Company LLC
National Oilwell Varco
Nautronix
Navigant

51
62
59
56
8
59
16
62
16
61
62
61
16
62
51
60
56
60
61
55

NETHERLAND, SEWELL
& ASSOCIATES INC.

BC

Noble
51
Noble Corp. plc
60
Noble Energy
20
Noble Midstream Partners LP
15
Northern Indiana Public Service Company 62
NuDevco Midstream Partners LLC
59
Nueva Era Pipeline LLC
16
NYMEX
3
NYSE
56
Oasis Petroleum
52
Observer Research Foundation
64
Occidental
52
Oil India Limited
64
Oilfield Helping Hands
62
OKOGA
62
OMV
53
ONGC
64
OPEC
3,18,28,34
OpenLink
62
Opportune LLP
59
OTCQX
56
Pacific Exploration & Production Corp.
61
Paragon Offshore plc
60
PDC Energy
20
Perella Weinberg Partners
50
Permian Express Partners LLC
14
Petrofac Ltd.
62
Petronas
12
PetroQuest Energy Inc.
56
Phase 4 Energy Partners Inc.
15
Pierce, Fenner & Smith Inc.
16
Pioneer
51
Plains All American Pipeline LP
16,51
Platts
32
PLS Inc.
52
Ponderosa Energy
55
PWC

PwC
QStar LLC
Questar Pipeline LLC
RBN Energy
Real Core Energy
Repsol
Resource Energy Can-Am LLC
Richards, Layton & Finger

34
52
16,53
30
44
41
54
16,55

COMPANY

PAGE

RKI Exploration & Production


44,51
Roc Oil Co. Ltd.
62
Rowan Companies plc
10
Royal Dutch Shell
49,62
RSP Permian
51
Rubison Oilfield International
55
Rystad Energy
20
Samson Resources Company
54
Santander
16
Santos Ltd.
62
Saudi Aramco
10
Schlumberger Ltd.
60
SEC
48
Shelf Drilling
11
Shell
40,53
Siccar Point
53
Simpson Thacher & Bartlett LLP
61
Sinochem Group
51,62
SM Energy
52
SMBC Nikko Securities America Inc.
16
Societe Generale
16,54
SolArc
62
Southern Star Central Gas Pipeline Inc.
62
SPE
44,62
Spectra Energy
53
Spencer Stuart
61
SPIERCE
56
Squire Patton Boggs
59
Statoil
51
Stephens Inc.
55
Stone Energy
53
Sumitomo Mitsui Banking Corp.
16
SunGard Energy
62
Sunoco Logistics Partners LP
14,53
Swift Energy Co.
54
Tesco Corp.
60
Tesoro Logistics Rockies LLC
14
TETCO
32
TIW Corp.
55
Top-Co Holdings Inc.
55
Tourmaline
53
TransEnergy
53
Triple Point Technology
62
TSX Venture Exchange
61
Tudor, Pickering, Holt & Co.
50,55,60
Tug Hill
53
Ultra Petroleum Corp.
57
US Chamber of Commerce
48
Venture Global LNG
61
Veritas Energy Partners Holdings LLC
54
Viking SeaTech
61
Vinson & Elkins LLP
51,54
Warburg Pincus
55
Weatherford International plc
59
Weil, Gotshal & Manges LLP
51
WellDog
56
Wells Fargo Securities LLC
16,54
WesternGeco LLC
57
Westney Consulting Group Inc.
60
Whiting Petroleum Corp.
14,52
WildHorse Resources
52
Wood Mackenzie
3
WPX Energy
3,24
Wunderlich Securities
55
XTO Energy
59

63

12/5/16 1:23 PM

THE FINAL WORD

Gas pricing in India


MANISH VAID
DARSHIT PAUN

ACCORDING TO the BP Statistical Review of World Energy

for 2016, Indias primary energy consumption has increased by


24% from 565 million tonnes of oil equivalent in 2011 to 700.5
MTOE in 2015. The worlds third-largest energy consumer, India
is in the early stages of energy transition, but its consumption
per capita remains about one-third of the global average. About
240 million people still have no access to electricity.
With its economy expected to grow at over 7% for the next
couple of years, Indias energy demand is set to increase robustly.
However, it would be a challenge to offset to the increasing reliance on crude oil and natural gas imports, which currently fulfils
over 80% and 40% requirements, respectively, with domestic
production.
Therefore, efforts are underway to augment domestic oil and
gas production through several policy measures such as early
monetization of discoveries, assessment of about 1.5 million
sq. km of un-appraised area in Indias sedimentary basins, reassessment of hydrocarbon resources, setting up of National
Data Repository, use of modern technology for maximizing
production from mature fields, and improving the recovery
factor.
Further, by introduction of a new Hydrocarbon Exploration
Licensing Policy covering all kinds of hydrocarbons under a
single licensing framework, the government has simplified the
auction process. This policy permits the use of a revenue-sharing
model through an open acreage mechanism. Future exploration
opportunities will come mainly from offshore basins, and the
government has introduced marketing and pricing freedom for
new gas production from deepwater, ultra-deepwater, and high
pressure/high temperature areas.
Indias push for a natural gas economy requires a conducive
gas pricing environment for domestic natural gas, as relying on
LNG imports could become costlier after the gas prices rebalance. For natural gas to play a pivotal role in shaping Indias
energy future, it is important to have a balanced gas pricing
mechanism that takes into account consumer affordability and
the viability of producers.
In an effort to make upstream investments attractive, the
Cabinet Committee of Economic Affairs in 2014 approved revised
pricing guidelines for domestic gas that went into effect in
November of that year. The formula is linked to a weighted average of a set of international energy prices, including the US
Henry Hub, UK National Balancing Point, the Alberta Reference
Price, and the Russian domestic gas price.
The government set the new gas price, which is revised biannually, at $5.05 per MMBtu on Nov. 1, 2014. The ceiling price of
gas produced from deep-sea, ultra-deep sea, high pressure and
high temperature areas, was set as per a formula approved by
the Cabinet on March 2016. The gas price for these areas was
64

1612ogfj_64 64

priced at $6.61 per MMBtu on GCV basis for the period from
April 1, 2016 to Sept. 30, 2016.
However, since that decision was made, global oil and gas
prices have fallen significantly, impacting the attractiveness of
the upstream sector to potential investors. The domestic gas
price fell to $2.5 per MMBtu, and the price ceiling for ultradeepwater, deepwater, and high-pressure/ high-temperature
gas dropped to $5.3 per MMBtu. This represents a decline of
18% and 19.8%, respectively, during a six-month span.
Domestic gas prices have now fallen below the average cost
of production for many companies, say ONGC and Oil India
Limited, which have an average cost of production of $3.59 per
MMBtu and $3.06 per MMBtu, respectively. These producers
and others have been hit hard by the price decline, which will
adversely impact new gas development projects.
However, lower gas prices are having a positive impact on
the power, fertilizer, and city gas distribution sectors. The price
decline has improved the cost competitiveness of domestic
gas-based power projects against coal-based power generation.
Similarly, the government subsidy to the fertilizer sector for
FY2017 has been reduced due to lower fuel costs. Prices for
compressed natural gas and piped natural gas are now more
attractive compared to petrol/diesel fuel and LPG, which will
create new demand in both segments.
The pricing of natural gas in India, therefore will play a crucial
role in supporting Indias natural gas ambitions. Since the pricing environment of natural gas in the country fulfills dual, albeit
contrary, objectives of incentivizing the domestic natural gas
production and making natural gas economics attractive for
consumers, these should be balanced well.
As a net importer of natural gas, India thinks the price of
domestic natural gas should not be a deterrent for gas producers. It should be such that it allows natural gas producers the
incentives to tap into the huge gas resource potential within
the country. In this regard, similar pricing and marketing freedom, if allowed for onshore discoveries as well, may create a
sustainable pricing environment. However, for this to happen,
it is crucial to maintain the competitiveness of natural gas vis-vis other fuels.
ABOUT THE AUTHORS

Manish Vaid is a junior fellow with the


Observer Research Foundation in New
Delhi with research interests in energy
policy and geopolitics. Darshit Paun
is an oil and gas professional, with a
masters degree in business administration in energy and infrastructure from Pandit Deendayal
Petroleum University, Gandhinagar, Gujarat.
WWW.OGFJ.COM

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