World Finance 2011 Interview with Chris Faulkner

In a recent interview with World Finance Magazine Chris Faulkner, Breitling Oil and Gas CEO, discusses the latest industry developments.

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“Texas-based Breitling Oil and Gas is tirelessly working on its promise to deliver competitive and sustainable rates of return to investors by developing, acquiring and exploring resources key to the globe’s welfare. Chris Faulkner, who founded Breitling in 2004, has led the company to major successes with the help of fundamental principles that apply state-of-the-art petroleum exploration, natural gas exploration, and extraction technology to the development of onshore oil and natural gas projects. Faulkner speaks to World Finance about the latest industry developments.


What are the benefits of Hydraulic fracturing and to what degree do you utilise the method at Breitling Oil&Gas?

America’s demand for natural gas and oil is more essential than ever before. Now that a clean, green environment is a top priority, natural gas is a leading alternative to replace coal and oil because it burns much cleaner. Many of the freshly drilled natural gas wells fail to produce gas fast enough to sustain an economically beneficial well. Hydraulic fracturing has allowed the natural gas and oil to flow more freely, increasing the rate of flow to the surface. It has also allowed for more oil and natural gas to be considered recoverable, increasing America’s oil and gas reserves. Statistics conclude that as a result of hydraulic fracturing, 600 trillion cubic feet of natural gas and seven billion barrels of oil have been attributed to meet the nation’s energy needs. Fracturing is estimated to be responsible for 30 percent of US recoverable oil and gas reserves. Around 95 percent of the wells Breitling Oil and Gas drills have some type of hydraulic fracturing stimulation to it, some as small as 50,000 gallons and others as high as four million gallons. It’s a tool we rely on in almost every well.
How has the oil and gas industry evolved in the US post BP disaster? Do you expect it to get worse?

The American oil and gas industry still has not recovered from the deep water drilling moratorium instituted in the US post BP spill.  I expect things to get worse before they get better as it seems all “Federal eyeballs” are focused on the oil and gas industry. The current administration wants to get rid of oil and gas tax incentives and proposes measures such as:

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  • Repeal of expensing for intangible drilling costs
  • Repeal of the deduction for tertiary injectants
  • Repeal of the exception to passive lose limitations for working interests in oil and gas properties
  • Repeal of percentage depletion for oil and gas wells
  • An increase of geological and geophysical amortization for independent producers to seven years from five
  • Repeal of the Internal Revenue Code Section 199 domestic manufacturing deduction for oil and gas companies.
[/bulletlist]

Contrary to the president’s belief, his budget proposal does not target so-called ‘Big Oil,’ but instead goes after the thousands of small businesses, America’s independent oil and gas producers, who employ only 11 workers on average.

How significant is the current shale gas industry and the emerging basins in North America?

I think what we are seeing now is a transition from just shale gas to shale oil and that boom will continue into the future. New shale basins are being discovered continually in North America with the Horn River, Utica and Montney Shales being some of the most recent. Shale gas is the most important major new source of energy on the planet, as well as the most significant development in the petroleum economy since deep water drilling. Ten years ago, shale gas was just one percent of American natural-gas supplies. Today, it is about 25 percent and could rise to 50 percent within two decades. Estimates are that the US has more than a 100-year supply of natural gas, thanks to the development of shale gas.

How will the state of the shale gas boom in North America and some of the trends in China affect the market?

Smart US investors have done well from the surge in US shale gas production. But, there’s an even bigger game in town – the development of China’s shale gas industry. By some estimates, China’s shale gas reserves are second only to America’s. Things are still at a very early stage in China but if the Chinese government opens its market to the best US shale gas developers, they and their investors will ride the resulting boom for decades.

According to information released by the US Energy Information Administration in April, China has 1,275 tcf of technically recoverable shale gas resources, nearly 50 percent more than the US. Domestic shale gas, if fully exploited, would have enormous impacts not only in China, but worldwide. It could moderate China’s skyrocketing demand for petroleum, one of the primary drivers of higher oil prices. It would mean less coal gets mined and burned, which would have widespread environmental benefits and also ease the strain on the nation’s transportation infrastructure, a large part of which is now devoted to moving coal from where its mined to where its burned for electricity.

China’s goal is to produce 30 billion cubic meters a year from shale, equivalent to almost half the country’s gas consumption in 2008. Exploiting shale gas reserves however, requires a mix of special equipment and know-how, which is far harder to obtain. A lot of the most successful shale gas fields in the US, for example, use horizontal drilling, a method pioneered in US, that allows operators to drill down to a certain depth and then to drill at an angle or even sideways. This exposes more of the reservoir, permitting the recovery of a much greater amount of gas.

Are there still good conventional oil plays in the US?

I think we are in good shape when you look at the current state of conventional oil and gas wells, including enhanced oil recovery and arctic technology, and make projections on how technology could impact these businesses in the future. An estimated 400 billion barrels of technically recoverable domestic oil resources remain undeveloped and are yet to be discovered, from an undeveloped remaining oil in-place of over a trillion. Of the 582 billion barrels of oil in-place in discovered fields, 208 billion has been already produced or proved, leaving behind 374 billion barrels. A significant portion of these 374 billion barrels is immobile or residual oil left behind after application of conventional oil recovery technology. With appropriate enhanced oil recovery technologies, 100 billion barrels of this “stranded” resource may become technically recoverable from already discovered fields.

How do you see the natural gas commodity pricing and its impact on shale gas drilling developing?

For years, natural gas has been unloved and undervalued, a commodity whose price has faltered so badly that even some of it its biggest producers have written off the possibility of a comeback for nearly a decade.

In the near term, forecasts of a cold winter are suggesting that demand for natural gas could surge for heating. Long-term, a recent US initial approval for exports of liquefied natural gas has created expectations that demand from foreign markets, where gas is priced much higher, could help drive up domestic prices. In the medium term, those who analyse North American natural gas drilling suggest that the current gas glut, since companies have shifted their focus to oil, bring far better returns.

Because shale gas is so prolific, many believe it has created a glut that is likely to keep prices depressed for a long time. Yet markets have been surprisingly kind to natural gas products. I believe gas will recover to $6, still far from the heights of years past but enough that most producers can substantially boost today’s anaemic profit margins.

Earlier this year, for the first time in several years, the number of rigs drilling for oil surpassed those drilling for gas. More importantly, those rigs are increasingly chasing so-called wet gas wells that also produce liquids. For example, drilling in the “dry” US Haynesville play has decreased over the past year at almost exactly the same pace that activity has increased at the “wet” Eagle Ford and Granite Wash play, where Breitling Oil and Gas currently has operations in conjunction with our drilling partner Devon Energy.

Are LNG exports a reality in the US already?

The massive increase in US shale gas production and reserves in recent years has turned the US gas market on its head, prompting traditional LNG importers to launch plans to export domestic gas overseas. The LNG industry is still grappling with the idea that the US, once expected to be a major importer of LNG, now has the potential to become a big exporter. Two liquefaction plants have been proposed in the US this year on the site of existing import terminals, both of which could be online by 2015. The potential is to initially export around two billion cubic feet per day of LNG from the United States overseas.

The bet for export is that US gas prices will stay low versus European and Asian gas prices over a 25-year period, making it profitable to produce and ship gas from the US overseas. US gas prices have fallen by 20 percent since the beginning of the year, pressured by ample domestic supply, tepid demand and record high inventories. Conversely, oil-indexed prices in Asia and Europe have risen, widening price spreads across the world. Export from the US looks doable, but requires gas prices to be lower than those in Europe and Asia over a longer time period. Should the price spread between the US and European or Asian prices narrow then these new export projects may struggle to get built.

What is the outlook for the natural gas industry through 2020 and beyond? Can the industry actually meet growth projections?

Natural gas prices will remain in the $5 to $7.25 per MMBtu range for most of the eight year period with a 2020 forecast price of $8 per MMBtu. I am confident the natural gas supply will become more diverse, in contrast to the traditional 85 percent and 15 percent Canadian supply mix that we have come to expect. We will see greater supply diversity in future, including major contributions in the form of Alaskan natural gas but very limited LNG imports. The US and Canada will become suppliers to the world energy markets (namely Asia and Europe) through LNG exports from 2013 and beyond. Delays or denials of these sources will shift supply to more expensive marginal sources of domestic natural gas. In spite of higher prices, annual natural gas consumption is projected to exceed 30 Tcf by 2020. My thoughts are this growth will be attributable primarily to continued rising demand for gas to power electricity generation and demand from big user countries like the US and China.”