Europe’s Shales: Understanding the Value Proposition
Chesapeake Energy ended up buying William Marble’s company for about half a billion dollars. The prospects for similar success in Poland had pulled him out of retirement.
In a panel discussion dedicated to “Shale Acreage and Joint Ventures” at the Unconventional Gas and Oil Summit in Warsaw, Poland, Mr. Marble, Shale Exploration Advisor, Texas, Silurian Hallwood recalled his experiences with shale acreage and joint ventures in the Barnett shale in Texas, where he significantly raised the output of the company’s wells in basin.
He explained: “We are the marriage of a Polish company, Silurian and a US firm called Hallwood. Through this marriage we ended up with about 1 million acres of concessions in Poland and went in and raised GBP 13 million, which ended up being close to GBP 19 million. We have a long history of experience in tight gas and shale in all of North America; we’ve worked in seven different shale basins in North America.
“In 2001we started in Johnson County, Texas, where there had never been any production at all. So if anyone wants a baseline, simply look at Johnson County. There was zero production, 67 dry holes before Hallwood got there. Our first well was a successful discovery and after 71 wells we had one dry hole – it was picked by a geologist. And we turned $6 million dollars of investor capital into $542 million and went on in our life very happily,” he recalled.
Hallwood then went to Canada and later established field rules in Texas, Arkansas, and in Alberta. “Field rules can be changed,” he said. “Shale is not that different than conventional. There’s a lot of mystique about it, but it’s just a word.
He said the company’s history was long in tight sands and shales and was varied.
Of activity in Poland, Mr. Marble said: “We’re now waiting on some concession conversion paperwork and when we get that we will drill three wells. Our plans are to drill the first well and eight days later conduct a multi stage fracc. We expect to drill three wells in 75 days, sometime in the second or third quarter of this year.”
San Leon Energy’s Director of Exploration John Buggenhagen began by saying that his company’s strategy was to build a diversified portfolio of land He recalled, “We used to have a saying when I worked on the North Slope of Alaska: ‘no lease, no grease.’ You can have the greatest idea in the world, but if you don’t have access to the land you’ll never make any money from it.
“So the first step we did was to come into places like Poland and then did a transaction with Talisman Energy who’s farmed in to our acreage and is helping us through their investment and expertise, monetize this asset. That’s the key, because we realized what we’re good at and what we’re not good at. We didn’t stop there, we wanted to continue to build the land portfolio, because we’re not naïve to believe that every concession will work,” explained Mr. Buggenhagen.
He said that if one looked at a map of San Leon’s concessions their blocks were spread all over the place. “We did that on purpose, because to be honest with you, being the geologist/geophysicist I didn’t really know, given he limited amount of data that was out there, where we wanted to be.”
He spoke of San Leon’s acquisition of Realm Energy.
“It was a great opportunity for us to very quickly pick up three blocks in Poland, doubling our position in the Baltic; we instantly added nearly 2 million acres in Spain; and we have tremendous applications in France.”
Buggenhagen said it was becoming increasingly difficult to execute the company’s investment strategy, because investment was required to do that. “Being a public company that requires access to public capital,” he said.
He predicted that there would be a phase of such consolidation transactions across Europe.
“The problem we face is creating a positive investment environment that will encourage not only market or private investment, but that will encourage companies to continue to invest,” he said.
“If people really thought we were going to drill 12 wells and prove Polish shale gas, they were very naïve investors.”
William Marble recalled his capital raising experience to delegates, that Polish shale was valid.
“Unfortunately,” he said, “there’s a wide chasm between those that have ‘been there, done that’ and have a practical knowledge of what it takes to make a shale play or tight reservoir successful and those that live in a world of theory.
“The investment community in London, unfortunately, is mostly the latter,” continued Marble. “They read press releases, they read news reports. Anyone that thinks 12 wells is enough to leave an entire country is fooling themselves. The press seldom gets things right. We need a reality check on the investment community, but getting the reality into the portfolio decision making process is very difficult. They want to see ‘results.’”
He said that when Hallwood had first raised money to drill in the Barnett there were papers written saying why the company couldn’t drill there. “And in 43 months we drilled 71 wells,” he quipped.
“That’s going to be a problem in Poland. Our business plan now is to drill three wells this year, 12-14 next year, assuming we are sure in our minds – no one else’s mind - and then 40 wells the year after. We have the rigs available, the fraccing equipment available, pipe, technology… We’ve done it before,” he said.
He added that there were one or two obstacles to doing that in Poland.
According to Mr. Marble, the advantage that Europe had was that it didn’t need to repeat the first decade of Barnett shale experience by Mitchell Energy. “You can start in 2001, when we started in the Barnett and within 12 months we built our own infrastructure; 6-8 months after that, our typical well was 5 million/day. So the learning curve can be very short.
“If given the opportunity, people who have hands-on experience have shown that the learning curve can be almost be vertical in a matter of just a few wells, not a decade or more. We as operators need the opportunity to do what we know how to do. The investment community needs to understand that, if the first couple of wells show there’s gas there, or oil, or hydrocarbons, a few more wells will actually have some commercial flow rates,” he said.
John Buggenhagen reported that in December 2010, San Leon had raised $100 million on the open markets. “We were able to convince Soros Fund to contribute 50%, and our second largest investor is Blackrock. I’m obviously not speaking for those investor groups, but they understand the value proposition; they’re in it for the long term.
“If people want to continue to make 3-5% on their money, then we can probably continue, but investors are looking for 10, 20 and 100 times on their money, and that’s the difference between North American investors and what I see in London, where I spend more than half of my time educating people about where the value proposition is. You can’t get in at the end and get the return on your investment,” said Buggenhagen.
He said that land prices would spike before the big flow rate came.
“As soon as somebody proves we can extract gas from these shales, you will see a consolidation just like we’ve seen in North America. Who’s it going to be? In my opinion, it will be the North American companies.”