Shale Gas: The Keys to Unlocking its Full Potential
President, XTO Energy
SPE Unconventional Gas Conference
June 14, 2011
It is a pleasure to be here today. For my talk today, I’d like to touch on how things have progressed during the first year of the XTO/ExxonMobil merger. I’ll also talk with you about where we see the future of our industry headed in terms of natural gas demand growth and, in particular, unconventional gas. I’ll highlight this growth with some data from ExxonMobil’s annual Energy Outlook.
In order to meet this global demand, technology and innovation will be key, and we’ve made great strides in this arena in recent years. I’ll touch on what XTO and ExxonMobil are currently doing.
Finally, it’s critical that we examine some of the social and political challenges facing all of us today. These challenges are not going away and we, as an industry, must continue to tackle these issues, particularly when it comes to hydraulic fracturing.
In just under two weeks, we’ll hit the one year anniversary of the merger, and I’m delighted to say that things have gone extremely well. We’ve been pleased with the progress made on integration andreverse integration. Our attrition levels have not increased from historic XTO levels. We have an established, purpose-built organization with deep experience and substantial capability across the broad spectrum of unconventional oil and gas development and production.
As good as the asset portfolio is, the highlight of the merger for me has been the addition of the knowledgeable, resourceful, innovative women and men of XTO to the ExxonMobil workforce. It is a true honor for me to work alongside such a capable group of employees.
This capability will grow further with the support of ExxonMobil’s upstream research and technology. For example, the drilling organization has introduced its FastDrill technology to our East Texas and Haynesville Operations. And XTO is working with our Upstream Research Company to design programs aimed at improving recoveries and increasing development efficiencies. We’re taking ExxonMobil’s vast research capabilities and work from the lab, and bringing it to XTO’s operations.
On the reverse integration side, we’re adding significant value through our support of the Corporation’s global unconventional resource developments. XTO employees have participated in numerous technical reviews of unconventional projects including some in Canada, South America, Europe and Asia through the sharing of best practices associated with drilling optimization, completions and operations, and by identifying appropriate analogs and potential resource upside.
At the same time, we’ve had the opportunity to host delegations consisting of both government and private business leaders from across the globe, sharing with them best practices and discussing industry challenges.
It’s this winning combination of people, assets, technology, and capital strength that has allowed XTO to continue pursuing more growth, adding to our already diverse resource base. Since Day 1 of the merger, we’ve added more than 13 TCF in bolt-on acquisitions for less than $0.30 per KCF equivalent. All our acquisitions offer us material operational synergies in key plays. Additionally, we have consolidated other ExxonMobil unconventional resource positions into XTO, including acreage in the Eagleford, Haynesville and Marcellus.
I’ll highlight three specific areas where we’ve made significant acquisitions over the past year.
Back in July 2010, we finalized a merger agreement with Ellora Energy, which added 46,000 acres to our position prospective in both the Haynesville and Bossier plays.
In December 2010, we purchased 150,000 acres from Petrohawk in the Fayetteville Shale Trend. This addition brought XTO’s total acreage in the play to 560,000 acres. Our current Fayetteville drillwell inventory is now in excess of 10,000 wells
In each case, the primary goal of adding to our position was to improve ultimate capital efficiency and economic scale.
And this month, we completed the merger with Pittsburgh-based Phillips Resources, Inc. and TWP Inc., which add a combined 317,000 acres of leasehold in the Marcellus Shale, bringing us to over 700,000 acres in what has been described as the 2nd largest gas field in the world. You might be wondering what the largest is…..it is the North field offshore Qatar and ExxonMobil is playing a key role developing that resource also.
With this merger, a new Appalachia Division based in Pittsburgh was created to manage this key high-growth focus area. We’re excited to welcome our new colleagues and look forward to bringing them into the XTO family.
So we’ll continue to pursue good values to enhance our current leasehold, doing so safely while improving capital efficiency and reducing our environmental footprint. These efforts create the opportunity for more jobs and investment in the production of natural gas.
Estimates show that the world’s remaining recoverable gas resource is estimated at 22,600 TCF. Based on our Energy Outlook numbers, by 2030, we expect that natural gas will supply more than 25 percent of the world’s energy needs.
Gas demand alone will increase more than 60 percent by 2030 versus 2005. Asia Pacific, for example, nearly triples in demand growth over this Outlook period.
This projected global increase makes sense. Natural gas is flexible. It’s the cleanest burning fossil fuel. When used for power generation, it emits up to 60 percent less CO2 than coal. And communities experience job growth, increased government revenues and more economic activity due to growing natural gas production.
Much of this demand will be met by the growing unconventional supply, as the combination of horizontal drilling with hydraulic fracturing have opened up new supplies of natural gas, once thought to be unrecoverable.
These resources are vast. Most have not been explored or evaluated to a great extent. The keys to unlocking these resources will be: the specific geology of the resource and distance to market; the available upstream development infrastructure in terms of rigs, fracing crews, proximity to existing pipelines; and the regulatory and environmental framework in the area.
Let me highlight a few areas where we see global unconventional resources expanding.
In Germany, ExxonMobil has licenses covering several million acres where we are currently drilling and evaluating coal bed methane and shale gas resources. ExxonMobil also is drilling and evaluating shale gas resources in southeastern Poland.
There are also large coal bed methane and shale gas resources in Ukraine that have not seen much exploration or evaluation.
And although we are further along back in the U.S., the benefits of shale gas development have only begun to be realized. With resources already identified and being developed, we have the natural gas supply to meet more than 100 years of current demand. And the supply is likely to grow further, especially with advances in technology.
We’ll need to continue improving the ways we discover, extract and produce natural gas through new technologies and techniques.
It’s something we’ve done for years. Dating back to the 19th century, advances in technology enabled gas to be safely and reliably used for cooking and heating homes. Years later, with the advent of the gas-turbine generator, power generation was made possible.
And in the past 70 years, advances in gas liquefaction and transcontinental pipelines enabled long-distance transport. Gas became a globally traded energy supply.
All of this was due to technology. The same holds true today as we move forward in the unconventional field.
As an industry, we’ve worked to improve our recovery rates and overall efficiency, making new wells more profitable. For example, in the Barnett XTO has managed to significantly reduce drilling times, from 28 to 14 days…and that’s even with longer horizontal laterals. This has provided great benefit to our operations and reduced our overall costs.
We’ve also made great strides in shrinking our environmental footprint. Multi-well pad drilling has reduced the number of well sites needed for development, and has provided improved efficiencies in drilling and hydraulic fracturing stimulation operations while reducing location costs.
Plus we’re continuing to work on ways to be better neighbors, finding more efficient methods ways to move water, reduce truck traffic and lower noise levels in the urban play setting.
One of the tremendous upsides to the merger with ExxonMobil has been the combining of a diverse research portfolio with the wealth of data from more than 35,000 producing wells.
So we’re integrating a wide variety of ExxonMobil technologies with our data and knowledge in order to enhance shale gas development and production.
For example, as many of you know, ExxonMobil was responsible for Multi-zone stimulation technology, which was developed in the late 1990’s specifically for the Piceance Basin in northwest Colorado to enable significantly greater access to the Basin’s “tight gas” deposits.
Now, working with the research company, XTO is examining ways to take this technology horizontal and utilize it in some of our existing plays, such as the Fayetteville.
Geophysics is one of the largest areas of research at ExxonMobil. One area of focus continues to be predicting faults to aid horizontal drilling.
If you look at the Woodford Shale play, early well costs were being driven higher by sidetracks and drilling difficulties related to faults. XTO geoscientists and engineers are now routinely using enhanced seismic interpretation techniques to plan and monitor well paths in order to avoid faults.
And finally there is our work to optimize fracture stimulation in both new and existing wells to enhance productivity. ExxonMobil is making a significant effort in this area — ranging from numerical modeling to predict fracture geometries, to controlled, large-scale experiments in our Houston research facility.
As you can see from the amount of time and effort that ExxonMobil companies have dedicated to this issue, we strongly believe technology will be critical to solving many of our unconventional challenges.
But it’s just one of the challenges facing the industry today. An even more significant one right now is the changing public perception of our industry.
There’s been growing skepticism and concern by the general public over unconventional resource development.
A general lack of understanding and familiarity of what we do, coupled with distortion of science and facts by some industry opponents, have made it increasingly difficult and sometimes impossible to conduct operations in some areas.
It has become commonplace to see press articles stating that another city, state, province or country has either placed a moratorium on hydraulic fracturing or banned it: New York state, Pittsburgh, Quebec, France, Germany, and South Africa to name a few.
In April, XTO experienced our own setback in the city of Southlake, TX. Our plan was to develop three sites in the area and connect them with one pipeline. We presented our plan, along with data on the economic benefits the project would provide to the city.
The opposition, though, proved that fear-based propaganda could win over the City. Two of the well sites were denied, making the project economically unfeasible. And more than 5,200 lessors won’t receive royalties. The City now has a temporary moratorium on the issuance of new permits.
The opposition has been out in front of the shale gas issue, and has gained numerous community, media and political allies in the process. Their points of attack range from groundwater contamination, spillage and disposal issues, to air emissions and property values. Most of it is based on misinformation.
Take, for example, hydraulic fracturing. We think of fracturing as the well stimulation technique that takes less than one week to complete. The public, though, has come to view the term to encompass the entire process of natural gas development. And, even worse, they believe the process is new and untested.
We have not done a very good job explaining where and how hydraulic fracturing fits into the shale gas development process, that it’s not a new technology but one that been around for more than 60 years and has been used in more than one million wells.
So how do we educate?
The bottom line: We must work together. This is a collaborative effort that starts with clear, consistent and coordinated messages.
ExxonMobil is aggressively pursuing efforts on this issue through industry associations, such as API and ANGA, and individually on the national, regional and local levels, to enable grassroots support.
We’re also involved in current national ad campaigns. These ads talk about responsible operations as well as the benefits that natural gas brings to communities.
As many of you know, we’re taking steps forward to disclose the ingredients used in hydraulic fracturing fluids via the voluntary registry, FracFocus.org. The site is a step in the right direction, particularly because it involves state regulators, who make up the leadership of the site’s owners, the Groundwater Protection Council and Interstate Oil and Gas Compact Commission, who are best positioned to handle this important information.
XTO plans to have all our wells back to the beginning of the year in the registry by the end of the summer.
Finally, it’s critical, more than ever, to practice what we preach to our communities.
There’s no doubt our industry has made a tremendous economic impact in the U.S. and there is plenty of data to prove it: $385 billion to the U.S. economy in 2008… 111,000 Barnett Shale jobs supported in 2008…50,000 new jobs in Pennsylvania in 2009…137,000 jobs supported in Colorado. It’s impressive.
However, when it comes to our messaging on health and safety, we struggle to communicate information regarding industry incidents, such as when fracturing fluid and flowback water have been inadvertently released on the surface due to well bore integrity or water handling issues. We, as an industry, know that none of these incidents were directly related to the actual hydraulic fracturing process.
But the public believes that hydraulic fracturing is the drilling process. That’s why it’s so vital that we work to avoid these incidents through proper well design and construction techniques, and prudent operational practices.
The bottom line: We have to show the public that our operations are a collaborative effort among landowners, mineral owners, regulators, and communities. Our success as an industry is linked to the success of the communities where we do business. Every time we talk to a councilman, attend a public meeting, or talk to our neighbors, we have to show them that safety, theirs and ours, is of paramount importance. Our employees don’t just work in their community; they and their families live there as well.
We must do all we can to restore the public’s trust and prove to our neighbors that we can develop these resources in a safe and responsible manner. Our industry depends on it.
In closing, ExxonMobil is looking forward to meeting the future demand for natural gas, both in the U.S. and globally.
We’re excited about continuing innovation not just at ExxonMobil with our new XTO subsidiary, but within the industry as a whole. Well-defined challenges tend to unleash human ingenuity, which can bring far-reaching technological advances that transform the economy, protect the environment and increase energy security.
We must also do a better job communicating with and educating the public to ensure we have the opportunity to develop these resources, providing this nation and others around the world the benefits of abundant, affordable, clean burning natural gas.