Jordan Blum, editorial director, Hart Energy: We're here at Hart Energy's A&D Strategies and Opportunities conference in Dallas. I'm joined for this Hart Energy LIVE Exclusive interview by Alex Ramos-Peon, the head of shale research at Rystad Energy.
What is the Rystad outlook for drilling inventory going forward?
Alexandre Ramos-Peon, head of shale well research, Rystad Energy: So at Rystad we have perhaps a slightly different view from most of the market in terms of the remaining inventory that can be drilled for shale wells in the Permian and elsewhere. We're thinking, well, perhaps what I should say is that we like to think of inventory as commercial inventories. How many wells get drilled every year depending on what the oil and gas prices will be. So we have a forward curve, and then we have an understanding of what the economics are in a given basin. So if I tell you that there are perhaps a hundred thousand remaining locations in the Permian, that means there's a hundred thousand wells you can drill in the future at prices that are economical in the future. If you increase the oil price, that number goes up. If you decrease the pace of drilling, that number goes up. So you can drill for 15 to 20 years in the Permian as of the status quo scenario.
JB: Very good. So there's obviously a lot of talk about different tiers. How challenging is it to define these different terms, these tiers, and in the Permian for instance, are we essentially getting into the tier two realm now?
AR: Yeah, so I think this tiering concept is one of the least well-defined in the industry. People mean different things by saying tier one, tier two. So perhaps the simplest way to measure this is in economic terms. So you would say you rank your wells by say, breakeven or rate of return. Then you say the top quartile is tier one, et cetera. Now that's measuring time. So today you have by definition, a quarter of the wells are tier one. So if what you mean is that the wells are tier one five years ago, they're gone. So today, you would still have a large amount of wells that are tier one or whatever that means. But the point is that you have the vast majority of the inventory in the Permian is largely economical at more or less any price range. So even what would be “tier three” in the Permian is excellent quality. So in that sense, it is a bit misleading to say ‘tier three’ because that sounds like a bad location, but it might be excellent. Now, by most metrics, it's—I’m not trying to say that there [are] no concerns whatsoever. So the core of the core has certainly been mostly drilled out in a lot of places, but we're still seeing very attractive economics for at least a decade in several of the key basins.
JB: So obviously the Permian's very competitive right now. It's hard to get good acreage, but how do you see all of this impacting M&A trends going forward? What are you going to see next?
AR: Yeah, so I think if you just look at recent history, there's been a lot of activity, and I think that's driven by two things, right? So oil prices are at an attractive location. A lot of private equity backed are trying to exit. And then we're out of the growth mode. So public independents can largely grow only by inorganic acquisitions because that's what the shareholders will allow them to do. They're also sitting on a significant amount of cash. So it's all of the pieces are where they have to be in order to foster this kind of activity. Now, if oil prices increase too much, then we will see no deals. They will be too much of a spread between ask and the bid ask.
JB: Thank you so much for joining us here today at the A&D conference. To read and watch more, please visit online at hartenergy.com.
