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January 29, 2016Conventional versus Unconventional Energy (5:24)
Shawn Reynolds
Shawn Reynolds
Portfolio Manager
“We’re still working on the assessment and appraisal of where all these resources are. As the years go on, we've got hundreds and thousands of wells to drill into these shales and unconventional resources that will be more manufacturing-oriented.”

Conventional versus Unconventional Energy

TOM BUTCHER: Shawn, thank you for joining me today.

SHAWN REYNOLDS: Good to see you, Tom.

BUTCHER: Can you give me a brief, high level overview of the basic differences between unconventional and conventional oil exploration and production?

REYNOLDS: In order to think about how oil is made and how it gets into a conventional trap, you need to think of a giant sponge, supersaturated with hydrocarbons, i.e., with oil. You have to think of that as being like the bottom of a big ocean hundreds of millions of years ago. All this dead plankton and hydrocarbon material floats to the bottom and gets soaked up into this sponge. Then again, over millions and millions of years, that sponge that is supersaturated with hydrocarbons starts to get buried deeper into the earth. With more sediment on top of it, it heats up and pressure rises.

As it gets squeezed, some of the hydrocarbon migrates out of it and starts moving up through different strata. As it moves through different strata it gets trapped in certain areas. Those areas would be the conventional oil and gas reserves that we've been drilling for a hundred years. They're very discrete pockets, which we sometimes call fields (they call them pools in Canada), and they're very discrete amounts and volumes of oil. That is what we look for.

There is often considerable geologic risk in finding unconventional oil and gas for conventional structures and oil and gas reserves; if you drill and you miss it, there is a dry hole. That is what we’ve done for a hundred years. If you are really good at exploration maybe you find one field in four or one in five.

Unconventional doesn’t entail looking for these discrete pockets or deposits. We're looking for the sponge instead. It's not even that hard to find the sponge; we know where the sponge is because we know where the pockets in the conventional deposits have been, and that sponge has to be underneath there somewhere. There's a great deal of hydrocarbon, oil, and gas that remains in the sponge. Consider a sponge from your kitchen sink: if you squeeze it, fluid comes out but you may still know there is a fair amount left in it. Therefore the geologic risk is smaller when it comes to unconventional energy. We pretty much know we're going to find the oil and gas when we're down there. There is no dry hole phenomenon. What you have is economic risk, however. The question becomes: when I drill into the unconventional “sponge,” can I produce enough at a certain rate, at a certain price, or at a certain cost that makes it all economic?

The difference between conventional and unconventional energy encompasses the technology we’ve talked about, horizontal drilling and fracking, which has opened up and made that unconventional sponge much more economic than we’ve ever seen in the history of the oil industry.

BUTCHER: It sounds as though the very nature of exploration and production companies has changed. Are they much more like manufacturing companies rather than the old fashioned conventional oil companies now?

REYNOLDS: Absolutely. The business model has completely changed; again, you used to spend ample time on the geologic risk. I was trained as a petroleum geologist; exploration geologist was my job. It was all about the geologic risk; we looked at Monte Carlo simulations and probabilistic assessments. Now it involves six sigma manufacturing techniques, optimization, and putting together an assembly line of drilling. The value chain starts at leasing and permitting, followed by drilling, fracking, hooking up and producing. All parts must be perfectly optimized for it to be economic.

We’re only in the early stages of actually achieving that because we’re still working on the assessment and appraisal of where all these resources are. As the years go on, we've got hundreds and thousands of wells to drill into these shales and unconventional resources that will be more manufacturing-oriented. There are only a few places in the country where we've actually seen that kind of well, and there are many more to come. You’ll see much more productivity as well as cost reductions.

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