The Dewatering Hole

I had to sigh this weekend as I began to receive emails and phone calls regarding the New York Times article entitled “Insiders Sound an Alarm Amid a Natural Gas Rush”. I encourage you to read this article and its companions. I don’t agree with many of the conclusions that are drawn, but it does serve to illustrate what critics of the energy industry are saying. And there is no doubt that the author (and evidently the New York Times) are indeed critics.

Having spent most of my professional career writing about energy issues, I understand and appreciate the power of the pen. Writing persuasively and interestingly can make a difference. In a world where the news cycle is 24/7 and people are swamped with information, anecdotes are king. The Times article wields cherry‐picked anecdotes like a samurai with a sword.

One snippet is as follows: “Money is pouring in” from investors even though shale gas is “inherently unprofitable”, an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February email. “Reminds you of dot‐coms.” End of snippet. Wow. That is good stuff. Captivating. Entertaining. But is it the truth? Or is it an opinion? I’m not sure that PNC actually has any dedicated energy analysts (I couldn’t find any on their website). So perhaps that cool quote came from a high net worth broker? Maybe he/she is a genius with reams of analysis on shale gas decline. Or maybe the observations are based on reading blogs and internet postings. One can’t tell from the anecdote. Which should I trust more? – the February 2011 $4.7+ billion purchase of Fayetteville shale gas assets by BHP Billiton or the February 2011 anecdotes from an unnamed broker of unknown quality?

Follow the money is usually a good credo.

The New York Times also captured the eye‐opening and alarming comments of Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas. Her research indicated Barnett shale wells were declining faster than expected. Fascinating. A Dallas Fed adviser has spotted an important issue. But is it the truth? Or is it an opinion? Would I be just as fascinated if the article quoted Deborah Rogers, proprietor of Deborah’s Farmstead, a small Fort Worth family dairy that produces goat cheese? That’s her bio from the 2008 Dallas Fed press release. Maybe Ms. Rogers is a closet petroleum engineer and excellent decline curve analyst. Maybe not. But 2011 Barnett shale gas production is at higher levels than 2009, with rigcount down by two thirds. That is not an anecdote seized by a newspaper reporter, it is a wellhead fact.

The Times article does make one statement that is dead on. The article says “these companies have been making predictions based on limited data and a certain amount of guesswork, since shale is a relatively new practice.” Indeed, natural gas comes from reservoirs 1‐4 miles deep in the earth. It seeps out through pore spaces so tiny they can’t be viewed with the naked eye. As such, almost everything about shale gas is an estimate. It is only natural that individuals inside and outside the industry are skeptical, curious, questioning and uncertain – as the anecdotes in their emails prove. The debate is healthy. Early estimates about various shale plays were too conservative in some instances and too aggressive in others. The Western Barnett turned out disappointing. The Marcellus is better than people initially thought. That isn’t fraud or deception, it’s the oilpatch.

It is this author’s opinion that recovery per well in gas shales will be closer to industry forecasts than the dire predictions of gas shale skeptics. But we can’t know for sure. Real money is made BEFORE estimates turn into facts. Just like the stock market.

Gas shale drilling has been wildly successful – just look at the quadrupling of U.S. shale gas production in the past 5 years. Right now, this is the same hollow success of long‐distance telephone carriers – volumes way up, prices way down. Even as oil prices returned to triple digits, an oversupply of gas has cratered gas prices. I believe that most new drilling for shale gas is uneconomic or marginally economic at current $4‐$4.50/mcf prices. So does the industry! The gassy Haynesville shale rigcount is down by ~30% from the peak. It will fall further during 2011 and 2012 as leasehold drilling requirements are fulfilled. Cheap prices, falling gas‐focused drilling, a recovering economy, eventual LNG exports ‐ this is why industry executives are getting more bullish on the gas macro. However, even with optimism growing, most E&P companies are still hedging 2012 gas production at $5/mcf and/or selling down gas properties to fund oil drilling. Midstream companies are building gas pipelines like crazy. Several new LNG export projects are under way. These actions by a myriad of companies, hundreds of executives and thousands of employees indicate the industry believes in both the short‐term and long‐term viability of shales. They are speaking with their capital budgets, their bonus pool, their acquisition budgets…not with their keyboards and chatroom postings. If there is any conspiracy or hidden agenda, it’s amongst those writing articles, not drilling gas shale.

For the record, our alternative investment strategies have essentially no directional investment in gas shale producers. As an investment thesis, I believe US natural gas is trapped in limbo between yesterday’s news and a recovery story. Oil is the hot ticket and I’ll be writing about the recent SPR news over the next day or two. If you have any questions, don’t hesitate to call or write.

Respectfully Yours,
Dan Pickering
Chief Energy Strategist

Also, check out additional feedback from Chesapeake’s CEO, Aubrey McClendon.

Following the Energy Industry’s Lead

The world of executive compensation is struggling to find its balance.  Over the last twenty years CEO compensation has tracked closely the growth in the economy, making the administration of executive pay relatively easy.  But with the dramatic reversal of markets and high unemployment, executive compensation faces pressures from outside influences that make the job of administering executive pay very challenging. The volatility of the market is forcing general industry companies to deal with the same issues the energy industry has dealt with for decades – there’s no one right answer to successful executive pay programs.  Today, the regulators and critics of executive compensation are influencing boards to administer executive pay programs in ways that fit with the latest definition of “best practices.”   Although the current emphasis is on increased regulation, it is essential to remember that the job of administrators is not to conform to the generic definition of a good program, but to oversee pay plans that actually work!  Over the years, I have observed that a well balanced approach to executive pay will pay great dividends to shareholders, and relieve some of the anxiety of outside directors carrying out their role.

The following are some basic principles that directors should consider as they navigate the changing environment of public company compensation committee membership:

It’s okay to be different. First and foremost, being different may actually be better than conformity in terms of encouraging optimum performance at the executive level. Empirical and experiential evidence suggests that one of the hallmarks of high performing companies is that they often do things differently.  They may get second guessed by academics, but this does not deter them. Not all effective executive compensation plans are configured alike.

Not all “best practices” are best. Journalists and critics are not the de facto arbiters of best practices for executive pay. It is not effective to assume that what others cite as best practices are in fact the wisest course of action for every situation. In addition, most public companies in the United States are not in the Fortune 50 and the rules and best practices for the largest companies are not universally applicable.  Last, many critics mistakenly think that pay practices from other countries should be adopted in the US, without considering the risk/reward implications.

Look for the “business case” in executive pay decisions. In today’s dynamic business climate, the momentum of best practices continues to move many companies away from certain pay practices just because it is the popular thing to do.  In the case of golden parachute agreements, for example, shareholders may not be best served by categorically eliminating such arrangements.  The merger and acquisition environment, the makeup of the executive team, and the nuances of the tax laws all have significant impact on the value proposition facing the company. These issues should be carefully studied in light of the business case before decisions are made.  The energy industry has long been a fertile field for mergers and acquisitions.

Discretion is the better part of valor. Don’t be afraid of discretion in managing executive pay plans.  Volatile markets make goal setting very difficult, which can dim the motivational effectiveness of incentive plans. The use of discretion however remains a very challenging process. Amidst pressure from both sides – upwards pressure from management and downward pressure from board of directors — compensation measurement and assessment is ever-evolving and goal setting is increasingly difficult. This pressure from both sides makes “soft issues” such as strategy, HS&E, organization development and other non-financial performance more important than ever. Directors of energy companies have known for a long-time that the exercise of discretion is key to maintaining motivational value of plans.

Not all risk is bad. Taking risks is a basic premise of being in business and most traditional pay plans are set up to balance risk.  Boards cannot take the risk out of executive compensation plans and expect a company to perform at a high level.  When viewed as a whole, the regulation and external pressure on executive pay is aimed at one thing – reducing risk.  This doesn’t mean that we should take mindless risk, but if we eliminate the risk from our pay plans, we shouldn’t expect superior returns.

Understand the purpose of the elements of pay. Everyone involved should understand the basic role of the various elements of the executive pay plans and administer each plan according to its design intention. For example, annual bonus plans typically reward for short-term strategic and financial accomplishment while long-term incentive plans reward for creation of shareholder value (e.g., TSR).  While the two should be closely related, administrators should understand the differences as they make decisions about results.  Too many outside observers don’t know the difference.

Advance planning promotes optimum results. Upfront work on establishing the company’s compensation philosophy, strategy, and guiding principles goes a long way towards ensuring the effectiveness of administration and program effectiveness.  These efforts help keep us on track as we walk the minefield.

Pay supports business culture. Executive pay is an important tool for the CEO in managing the business and supporting the corporate culture. Over time, we have felt the pressure to make it an academic exercise that is separated from the leadership of the organization, and more focused on compliance. This has led to dissatisfaction on several levels and continued debate that is often not productive.

Good people are good. Bad people are bad. Executives are not subject to the laws of cause and effect, and pay should not be viewed as a means to force certain behavior.  Good people will still behave admirably and bad people poorly, despite the pay plans.  The role of a director is to know the company’s people. It goes without saying that some compensation arrangements can lead to unintended results; the point is that the majority of arrangements in the market are well thought out and reasonable, and applied to reasonable and ethical people.

Constituent education is key. Shareholders and other constituents must be educated about the company’s compensation practices and supporting rationale in a clear and consistent manner. This will go a long way in developing the confidence of shareholders as it relates to executive compensation practices.

It’s okay to say no. Directors are under tremendous pressure to comply with expectations for executive compensation arrangements.  It’s okay to say no to payouts, pay increases, and other compensation arrangements if it makes sense and is consistent with the company’s compensation philosophy.  Many directors feel tremendous pressure to do what management expects them to do, but when directors are sensitive to external constituent interests, it may be prudent to say no.

Finding the balance in this time of transition will help ensure effective and meaningful executive pay plans for both the participants and the shareholders. The US based major oil companies are good examples of cyclical, businesses with long-term investment decisions where executive pay programs reflect this balance. These programs demonstrate well-conceived use of the elements of pay, support of their unique culture, and prudent use of discretion.  General industry companies may soon figure out what these energy companies learned years ago.

* * * * * * * * * *

Steve Cross is Managing Partner of Cogent Compensation Partners, headquartered in Houston, Texas. He has over 20 years of experience providing executive compensation advisory services to some of the world’s leading companies.

Website traffic to OilCareers.com, the international job board for the oil and gas industry, has increased by 33% in the U.S. alone from 2009 to 2010.

Figures also show a wider increase in traffic of 42% across the North American continent during the first six months of 2010, compared to the first six months of 2009. This increase is a result of OilCareers expansion at the beginning of 2010 with a new office opening in Houston and subsequent investment in a brand awareness campaign. Resumes uploaded increased by 33% from November 2009 to November 2010, demonstrating that users took the site to be a credible job resource.

From a global perspective, the job board’s talent pool of oil and gas specialists has grown to more than 780,000 users, and its global resume database has also experienced strong growth, up 23% on November 2009 to more than 465,000 resumes in November 2010.

The figures also highlight encouraging growth in a variety of roles, with increases in the logistics, administrative, health and safety, design, and trades fields.

Additionally the sales and marketing sector has seen a marked increase in opportunities, alongside operational, IT communications, HR, personnel and training vacancies, positions that are all considered leading indicators of increasing hiring.

It is a positive sign in an industry that, according to OilCareers.com’s Managing Director, Mark Guest, has clearly seen market vacancies affected by the economic recession over the last two years.

“Industry experts have projected an increase in oil exploration this year,” said Guest. “In theory, a consequence of this should be an increase in job vacancies, which will follow on from the improved signs in hiring we saw last year.”

“With strong oil prices, 2011 should offer great employment potential for people looking for positions within the oil and gas industry worldwide.”

On future trends, he added, “There is enormous scope for young and talented engineers to climb the career ladder, whilst concern for the environment is also expected to create new positions within the industry.”

Although the figures demonstrate areas of growth, OilCareers.com warned recruiters and candidates alike to approach the year with “guarded optimism”, following the release of its white paper, “The 2011 Oil and Gas Industry Hiring Outlook”.

The paper included a number of key observations, suggesting that businesses should focus on hiring in areas of demand, such as engineering, geosciences and undersea exploration and production.

It suggested that a near-term increase in exploration would see a rise in demand for drilling positions, however advised that a longer-term outlook was less positive, with a predicted 14% decrease in this area by 2018.

Another recommendation put forward is for companies to consider extra graduate hiring, recruiting ahead of demand and developing mentoring programmes to begin the transfer of knowledge to a newer generation of engineers and technical staff.

OilCareers.com also noted a potential increase in environmental positions, suggesting that companies may try to establish newly proactive positions in order to address public concern and potential new government regulation following the Deepwater Horizon incident.

Download the 2011 Oil and Gas Industry Hiring Outlook at http://www.oilcareers.com/hiring_outlook_2011/.

“Green” is no longer the magic bullet to solve our energy concerns, according to Dr. Joseph A. Stanislaw, an independent senior advisor to Deloitte LLP and founder of the advisory firm The JAStanislaw Group, LLC. Instead, says Stanislaw, a “transition from green to clean” can power the next phase of development of the world’s energy and economic sectors.

Stanislaw makes this argument in a new white paper titled, “Clean Energy 1.0: Moving beyond green to create sustainable jobs and a long-term energy strategy,” which focuses on the three interconnected mandates that are driving the evolution of clean energy in the United States: protecting the environment, creating enduring jobs and enhancing national security.

Stanislaw, who is the co-founder and former president and CEO of Cambridge Energy Research Associates, begins his white paper with historical context: “Just two years ago, when oil was levitating towards $100 a barrel and Russia was playing politics with pipelines — green energy was the holy grail of energy security. Then, when concern over climate change reached a fever pitch, it became the silver bullet to solve global warming. And, finally, when the ‘Great Recession’ struck, green energy was the panacea for unemployment and falling wages.”

This metamorphosis, he says, is part of a necessary maturing of the debate around energy because clean energy technologies must “evolve from their current 1.0 stage to a 2.0 stage and beyond.” He draws an analogy between clean energy and the high-tech industry: “Right now, clean energy is where the mobile-phone industry was in 1983, when Motorola released its two-pound, $4,000 DynaTac 8000x, or where the computing world stood that same year, when Windows 1.0 was launched.”

Stanislaw goes on to explain that the past two years alone have shown us that green energy is “no longer the magic bullet.” Clean energy, he says, can now take its “pivotal but mortal place in an array of energy forms and technologies that will power the world in the 21st century.” He claims that the ‘transition from green to clean’ will power the next phase of development of the world economy, as we race to create technologies that help us better produce energy and reduce its use.

The white paper points out that the stage is now set for a smart, long-term American energy strategy—for numerous reasons:
•    Energy is now top of mind: The federal stimulus bill has helped kick-start a massive investment in clean energy technologies and has shifted America’s psychology on energy.
•    Steering a new strategic course: Our recent immersion in clean energy has allowed us to better understand—through experimentation and debate—what our long-term energy strategy might be.
•    Clean beats green: We have come to understand that what matters most is not green energy but clean energy—whether it comes from the wind, clean coal, natural gas or nuclear. And, best of all, is Americans’ greater understanding of using less energy overall.
•    Energy is jobs policy: Policymakers have learned that energy policy cannot be separated from jobs policy—and that sustainable jobs matter most.
•    Energy improves the bottom line: The recession has underscored the pocketbook benefits of efficiency and clean energy for individuals and corporations, in addition to their positive impact on the climate change and national security. “Efficiency and clean energy are now firmly embedded in the consciousness of Americans,” says Stanislaw.
•    The public wants to go clean: Americans continue to insist that corporations “go clean,” thus shaping product development and capital allocation. “Americans should encourage policymakers to follow suit,” according to Stanislaw.

He advocates several steps to help move the United States along the clean-development continuum. First, he stresses developing a federal framework. “The absence of a federal framework is now an enormous handicap,” he says. “The federal government should not avoid mandating renewable power consumption nationwide. Whether the target is 20 percent of American energy coming from renewable sources by 2020, or something more modest, a mandate is important. Policymakers should not try to pick winners, but they should set targets.”

Stanislaw also stresses the need to reduce and manage energy demand instead of just producing clean energy. “Energy efficiency is perhaps the biggest untapped market for entrepreneurs, investors, and policymakers. It meets all the demands of those seeking to reduce emissions and increase national security, while having the potential to contribute mightily to the creation of sustainable, well-paying jobs.”

“And finally,” says Stanislaw, “research and development must rise again.” He cites an estimate that before the stimulus bill, the Federal government budget for energy research was the same today, adjusted for inflation, as it was in 1968 — about $3 billion. “This situation is made worse by a decline in energy-related research and development expenditures in the private sector over recent decades,” he adds.

“We should reverse this trend by creating market conditions to promote investments in research, development, and market penetration in energy efficiency, in new methods of consumption, and in all forms of energy, be they traditional — oil, gas, coal, nuclear — or alternative. “

Stanislaw concludes his white paper by reiterating that this is just the early dawn of the clean energy era. “Only in the past year or two has energy become a national state of mind,” he said. “But the historic importance of this can hardly be underestimated.”

He argues that businesses and governments should respond to this new reality by creating the products and services that will help Americans manage their energy consumption. Corporations, meanwhile, should realize that in addition to their core business, each and every one of them is an energy company, too — and that managing their energy usage can be critical to their bottom line. Last, policymakers can amplify these trends by creating the rules of the game and funding the research that will position the United States at the cutting edge of the clean energy evolution.

About the Author: Dr. Joseph A. Stanislaw serves as an independent senior advisor to the Energy & Sustainability practice of Deloitte LLP. Dr. Stanislaw is founder of the advisory firm The JAStanislaw Group, LLC, specializing in strategic thinking and investment in energy and technology, and cofounder and former president and chief executive officer of Cambridge Energy Research Associates (CERA). He can be reached via the firm’s website at https://www.deloitte.com.

Download Stanislaw’s full report, “Clean Energy 1.0: Moving beyond green to create sustainable jobs and a long-term energy strategy,” here.

The economic vitality created by just one natural gas well may have steady, active job production for up to 20 years. A typical gas well will produce both gas and a certain amount of oil or condensate. Most wells require a chemical treatment program. The chemicals used address problems from scaling and paraffin build up to H2S treatments. It is quite normal to have some type of field compression for enhanced or better rates of recovery from the reservoir. Naturally, everyone is interested in measuring the amount of gas and associated oil or condensate produced as to calculate the revenue from the well’s production.

From these various functions and components it is contended here that a typical well contributes to the livelihoods of 115 people. (Click below for the full report that describes how this figure is derived.) Each of these 115 jobs directly associated with the economic job engine of a producing well supports the livelihood of three more people as these paychecks are brought home and become consumer dollars.

There are also considerable economic benefits in the form of excise taxes into the coffers of state and local governments and royalty payments to the mineral owners.

Economic models established to justify other community activity are excellent tools for the oil and gas industry to utilize in demonstrating the economic stimulus our endeavors create. At a time when every job has value, we can never lose focus on the high value jobs that the oil and gas industry supply to our nation.

–Mark Goloby

About the Author: Mark Goloby is president of TC Technologies, which delivers wireless data-monitoring tools for oil and gas production and assets needed to support production. He can be reached at tctcom1@pdq.net.

Download Mark Goloby’s full report, “The Oil and Gas Job Multiplier:” theoilandgasjobmultiplier

The first quarter of this year saw a drop in gas prices of about 30%, resulting in a shift in strategy for oil and gas companies who had been betting on an increase in the price of gas. At the beginning of the year, it seemed we were looking at prices of $6 to $7 per MMBtu. Unexpectedly, supply is high, and today the price closer to $4.

The drop in gas prices will make the economics of many current gas projects, including shale gas, marginal in terms of profitability. The situation is amplified by slow demand through the recession, well-stocked storage space and increasing international LNG capacity, so there is no quick respite in sight.

Meanwhile, the price of oil has grown to more than $80 a barrel. As a result, we are seeing an increased focus on oil and more investment in areas with oil potential (like EOG Resources’ recent announcement that it will develop 500,000 acres in oil-producing areas).

Companies with a strong focus on gas and gas shale will need to find ways to maintain cash flow through cost reduction, streamlined operations, and other ways to free cash. In addition to low prices for gas sold, the current business case to their investors is based on an estimated production for the relatively few wells drilled and some extrapolation. This means they are highly leveraged and need to ensure a strong cash flow to maintain the development pace to achieve a positive return to investors in promised time frame.

To address this, we should expect to see companies with large exposure to onshore gas like Cheasapeake Energy Corp., Petrohawk Energy Corp. and Cabot Oil & Gas Corp. sell assets to maintain operations and a renewed focus on cost-control and cash-release initiatives as well as shift focus to liquids production as much as possible. In fact, we have already seen that Petrohawk recently sold some assets, and Anadarko Petroleum Corp. recently made a deal with a Mitsui Oil & Gas Exploration company in Japan.

–Jan Erik Johansson

About the Author: Jan Erik Johansson is vice president, energy sector, for Celerant Consulting Inc. He can be reached at jan.johansson@celerantconsulting.com.

Foreign companies that perform offshore services for the oil and gas industry on the Outer Continental Shelf in the Gulf of Mexico are now on the IRS radar screen, and so are the U.S. companies that hire them. The IRS is taking the position that these foreign companies and their foreign workers have “U.S. source income” and may be engaged in a U.S. trade or business.

Therefore, the IRS contends the companies and their workers must file U.S. tax returns and pay U.S. taxes due on amounts earned from these offshore services. In addition, the IRS is likely to contend that the U.S. companies that hired the foreign companies should have withheld and remitted to the IRS 30% of the amounts they paid to the foreign companies.

The IRS has also made clear that, in addition to taxes and interest due, it intends to assert various penalties against both the foreign and the U.S. companies, as well as the foreign workers. The red flags recently raised on this issue were the IRS’s designation of Foreign Withholding as a Tier One Compliance Issue and the issuance of an Industry Directive dated October 28, 2009, which specifically targets activities on the Outer Continental Shelf in the Gulf of Mexico. Tier One Compliance Issues generally have the IRS’s highest priority and are subject to the greatest scrutiny by IRS auditors.

What Is U.S. source income? What are the broad definitions? Why are foreign-vessel owners are hearing from the IRS? Preparation Is essential. Find the full 1,200-word report by clicking below.

–Andrius R. Kontrimas and Nancy T. Bowen

About the Authors: Andrius R. Kontrimas and Nancy T. Bowen are partners with law firm Fulbright & Jaworski LLP. They can be reached at akontrimas@fulbright.com and nbowen@fulbright.com.

Click for Kontrimas and Bowen’s full report, “IRS Focuses on Foreign Companies and Offshore Services:”irsfocusonforeigncompaniesfulbrightjaworski

Communication problems are as old as human history. Bridging gaps is a continual challenge, and industry leaders need to know how to capitalize on overcoming those gaps.

Within the oil and gas industry (as well as in other industries), there are four generations of talent: Traditionalists (birth years 1925-1945), Baby Boomers (1946-1965), Generation X (1966-1980) and Generation Y (1981-2000). Since the 1990s, professional journals have alerted oil and gas leaders that the Baby Boomers, now the largest percentage of the workforce, are exiting the workforce at an alarming rate. The potential consequences include:

–Increased competition for talent. Due to the decrease in skilled talent following the retirement of the Traditionalists and Baby Boomers, competition for workers with required professional degrees and experience will increase.

–Shifting geography. Technology enables talent to work from anywhere and teleworking is becoming more commonplace; therefore, organizations will be able to source talent globally. This shift will affect organizational communication, strategy and business processes.

–Shifting generation. The corporate leaders of tomorrow will most likely be talent from Generations X and Y. Currently, organizations are balancing the activities of retiring two groups and preparing the organization for two others, while not neglecting any.

–Aging workforce. A majority of Baby Boomers are predicted to exit the workforce by 2015 and are followed by a much smaller group of talent, Generation X. In addition, the next generations of talent have different learning styles, communication preferences and work/life balance requirements than their predecessors. To recruit, retain and develop the next generation of talent, organizations must recognize and adapt to these styles.

–Lost information and tacit knowledge. As Traditionalists and Baby Boomers exit organizations, some for the last time, so will their communal know-how—their tacit knowledge—especially if it has not been adequately identified, captured, codified and stored in corporate knowledge repositories.

–Preparing and training talent. The fact that Traditionalists and Baby Boomers are retiring does not mean that they will not re-enter the workforce in some capacity, such as starting a new career, or working as a consultant or part-time employee. In some cases, organizations will be able to leverage veteran expertise in this way. As a result, organizations will need to update the skills of these workers, or train them along with other new hires. Thus, learning/training departments may simultaneously have to train several generations, each having distinctly different learning styles. This can perplex learning organizations that do not understand the needs of each generation.

–Sebastian Francis

About the Author: Sebastian Francis is senior consultant, commercial business services, for SAIC Corp. and specializes in knowledge management and organization learning within SAIC’s oil and gas practice. He can be reached at Sebastian.L.Francis@saic.com.

Click for Francis’ full report, “Better Knowledge-Sharing: Fill The Dry Knowledge Well With These Practices:” knowledgewellsebastianfrancissaic2010

Oil and gas markets have experienced significant changes during the past two years. Between crude oil moving from $146 to $33 in less than five months and gas going from nearly $14 to $3 over the course of a year, the past 18 months have been incredibly volatile to say the least. Adding insult to injury, the state of the capital markets has left many producers without access to much needed capital.

In these times of significant change and uncertainty, it is essential that oil and gas producers employ solid hedging and marketing strategies. These strategies will not only allow producers to survive the most challenging times, but will also allow them to excel in the best of times as well.

Houston-based EnRisk Partners, an energy hedging, trading and risk-management advisory firm, recently surveyed 38 U.S.-, Canada- and Australia-based small and midsize independent oil and gas producers about hedging activity in 2009.

The primary focus of energy risk management as it relates to oil and gas producers is hedging.

Consequently, this subject forms the basis of this study, which strives to analyze the current hedging practices and strategies of producers. Some of the key survey findings are:

–41% of study participants regularly hedge their production, while 29% never hedge.

–Only 13% are required to hedge by their lenders and/or investors.

–The majority of the participants that hedge on a regular basis stated that, on average, they hedge between 51% and 71% of their current PDP (proved, developed, producing) volumes.

–36% of the participants stated that their CEO or CFO makes the company’s hedging decisions.

–Swaps and collars are the most popular hedging instruments among the study participants.

–Only 34% of the participants indicated that establishing stable and predictable cash flow is the most important goal of their hedging activities.

–67% said they would characterize the success of their company’s current and past hedging initiatives as good or excellent.

—Mike Corley

Click for Corley’s full report, “2009 Crude Oil & Natural Gas Hedging Study:” enriskpartners2009hedgingstudyresults.

For more on current hedging trends in E&P, look for the upcoming article, “Hedging Horizon,” in Oil and Gas Investor’s April 2010 edition at OilandGasInvestor.com.

Booking proved undeveloped petroleum reserves has become a give-and-take exercise under new U.S. SEC regulations. Oil and gas companies are reporting both upward and downward year-end PUD revisions in the same properties.

– Based on a new “reasonable certainty” standard, companies are reporting PUD locations at distances greater than one legal offset from economically producing wells in their year-end 2009 results. That has boosted PUD reserves, especially from shale-gas locations.

– Reporting companies took PUD wells off the books if they were scheduled to be drilled more than five years from initial PUD assignment. Few exceptions were made, but more were expected in 10-Ks to be filed on or before March 15.

Cabot Oil & Gas Co. reports it made an exception for 16 Bcfe of PUD reserves delayed by “external factors.” However, it removed 120 Bcfe of PUDs that fell outside of the five-year development window by reclassifying them to probable. That was consistent with a reallocation of its capital program to develop assets in Pennsylvania and East Texas.

Across the industry, proved reserves, including PUDs, also dropped because average commodity prices for the year were lower than year-end prices. The SEC changed the rules from a one-day year-end price to an annual average to lessen the effects of volatility.

Some companies detailed the extent to which the five-year limitation decreased PUDs and multiple offsets increased them. For Bill Barrett Corp., the net effect was to boost PUDs. The company said it included additional offsetting locations, where warranted, in the Williams Fork formation in Gibson Gulch, a basin-centered, “continuous” accumulation of gas. That increased PUDs for the field by 64 Bcfe. The five-year limitation “had a nominal impact of reducing reserves by 7 Bcfe,” the company reported.

For The Williams Cos. Inc., the net effect was a “wash.” Williams reclassified 496 Bcfe of reserves from PUD to probable because of the five-year limit, while adding 454 Bcfe of PUD reserves through additional offsets.

Companies also assigned PUD locations more than one direct offset from a producer not only in shale, but also in conventional accumulations. Barrett’s Williams Fork produces from sandstone reservoirs.

–Mike Wysatta

About the Author: Mike Wysatta is business-development manager for Ryder Scott Petroleum Consultants based in Houston. He can be reached at 713-651-9191 and mike_wysatta@ryderscott.com.

Click for the PDF of Wysatta’s full report on this, including how the new SEC reserve rules were incorporated in year-end results for Newfield Exploration Co., Pioneer Natural Resources Co., EQT Corp., Petrohawk Energy Corp., Noble Energy Inc., Range Resources Corp., Bill Barrett Corp., Ultra Petroleum Corp., OAO Novatek, Rosneft, Petrobras and Chesapeake Energy Corp. and other reserve-analysis articles in the March-May 2010 issue of Ryder Scott’s Reservoir Solutions newsletter: reservoirsolutionsryderscottmarch2010.