Summary of Executive Roundtable Discussion on COVID-19 and Commodity Price Related Issues Specific to the Upstream Industry

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On Thursday, April 2nd, we hosted the fourth webinar event in a series of virtual roundtables. These events are designed to bring together senior leadership from across the industry to discuss global impacts and share best practices on how to deal with the current disruptions in the market. These roundtables will continue to be held weekly on Thursday from 3-4:30 PM CST.

Production Curtailment & Shut-in Considerations

We had a robust discussion on the topic of production curtailments and shut-in production. The conversation trended along a few key areas: Candidate Identification, Cost Attribution, Ability to Bring the Well Back Online and Regulatory Considerations.

One interesting point made during the session was that more than one operator indicated a preference for choking back production at a fixed rate across their assets as opposed to actual shut-in production as it avoids many of the contractual triggers. This would allow operators to minimize the regulatory requirements and leaseholder approvals which can be time consuming and expensive to navigate.

One key differentiation in this cycle versus 2014-2016 is that the capital markets are generally less supportive of Oil & Gas, this likely makes the ability for operators to “drill-through” the downturn less of an option. Another consideration was what action the banks will take; historically, lenders were generally lenient on access to credit facilities when covenants were breached, but with the current global macro backdrop, and the prospect of a protracted deflationary commodity environment, this stance is looking less probable.

Identification of Shut-in Candidates

Key Considerations

  • Fixed versus variable costs: Many of the attendees pointed towards the issue of identifying what is a fixed cost versus a variable cost from a true operational perspective.
    • This issue is further compounded when the time horizon is refocused forward. For example, if a well is flowing 20 bpd, does a $3k intervention make sense when wellhead realizations are <$10/bbl and potentially headed lower?
    • The other variable which makes these decisions difficult was the analysis of what happens to the cost structure at the facility level when candidates begin to shut-in individual wells that flow into the facility.
  • The expected timing of the shut-in and potential remediation of the well must also be considered. All costs are variable with a long enough time horizon.
  • When discussing the question of whether unconventional wells can be shut-in and then brought back online at a later date, one operator in the Rockies shared that they had been forced to do so in the past because of gas line issues. They found that some wells returned to where they were previously, but a large number did not, and there was no clear indication as to why there was such a large discrepancy.
  • There was additional consideration towards the impact to surface facilities that was highlighted by one of the Canadian operators in attendance. For example, does the risk of a spill from a tank/flow-line increase over time if those systems are allowed to stagnate? Would this potentially require an additional cost to fully clean and prepare the infrastructure ahead of any production curtailment activities?

Process

  • At the highest level, one operator has begun grouping wells together based on production and artificial lift type. They noted the idea was because operators do not want to impair their highest production assets which have equipment downholes that may seize up or cause undue costs.
  • The idea around standing up shut-in identification meetings on at least a weekly basis seemed to be a common practice with many attendees. Many commented that the identification of targets and planning around these resulted in huge amounts of G&A time.
    • To help with this, we highlighted useful tools such as “ThoughtTrace” during the technology portion of the session which uses advanced NLP to streamline the parsing of contracts.

Near-Term Economics

On the topic of the near-term economics, most operators felt that it was unlikely there would be a quick snap-back in the commodity. This is largely due to the physical supply surplus that has been accumulating over the past few weeks.

The current incremental margin appears to be in the $5-10 range for most operators – dependent on asset specifics and location. It appeared that most operators were willing to deliver crude at those prices on a short-term basis (a few weeks). The phrase “Cash Flow is King” was mentioned more than once. It was clear that realized pricing at those levels would be net negative once aggregated to the corporate level.

Long-Term Economics

The longer-term commodity cycle is an open question at this point. One of the key considerations both we here at Darcy and that the broader community has been struggling with is, even if demand recovers steeply in 2020, how long will it take for the ~20MM b/d imbalance to work through the system? Hopefully there will be additional clarity on the supply side coming out of the OPEC+ emergency meeting that is currently scheduled for Thursday, April 9th.

Descartes Labs

Representatives from Descartes Labs joined the roundtable to shed some light on when the economy might come back online. Descartes Labs specializes in the mass collection of data from aggregate sources to answer difficult questions such as “When will we reach storage capacity?”, “How is our supply chain being affected?” and other use cases specifically geared towards the Oil and Gas industry. They are currently using near-real-time data to track macro indicators like mobility, vehicle and air traffic and NO2 levels across the globe. The world appears to have come to a temporary halt and this data may prove to show the first signs of a semblance of norm once regions begin to get back to life as we once knew it.

To contact Descartes Labs directly, please reach out to the following:
Jim Hollis – jim.hollis@descarteslabs.com
James Orsulak – james@descarteslabs.com

Production Curtailment Priorities / Decision Criteria