It’s not shocking to learn that world oil production is expected to grow modestly over the next five years. But when you look at WHERE that oil growth is expected to come from I bet you’ll be surprised.
To get a perspective from the field, today I’m talking with Stephen Bull, Vice President of Strategy DPNA for Statoil. To find out how Statoil is playing an integral role in America’s energy boom AND why this Norwegian company is one of the best kept secrets in North America, listen to the full interview below…
Full Transcript Below:
Matt Insley, Managing Editor, Daily Resource Hunter:
Welcome to the Daily Resource Hunter. This is our operator spotlight. Today, I have the pleasure of talking with Stephen Bull, he’s the Vice President of Strategy for Development and Production in North America onshore for Statoil. Stephen also heads up the integration team in their Bakken business unit. As we know, the Bakken and a lot of unconventionals in the US have been booming lately. Stephen, thanks for being here. It’s great to sit down and talk with you today.
Stephen Bull, Vice President, Strategy DPNA Onshore, Statoil: Thank you, Matt.
Matt: We might as well get right into the questions. Before we get into any details, could you tell us a little bit about your company, Statoil?
Stephen Bull: Yeah, sure. Statoil will be 40 years old this year. We’re an international company with operations in 41 countries. We have 21,000 employees, and we’ve got a market cap now of about $83 billion. For the last 10 years, we’ve been listed on the New York and the Oslo stock exchanges. Really, the company started out on the Norwegian continental shelf as the national oil company of Norway, developing resources there. Since that time, particularly in the last 10 years, we’ve grown our international portfolio pretty big — nearly 25 percent of our production now comes from the international outside of Norway.
We’re producing just over 2 million barrels a day, and then we’ve got pretty ambitious growth targets. We had a 3 percent growth rate annual on the last 10 years, and we expect to have the same one for the next 10 years going out there. The company itself is sort of a semi-national and private oil company. Our goal is to accommodate the world’s energy needs in a responsible manner, and apply the technology that we’ve developed over the years to create innovative business solutions.
Matt: And that clearly has pointed you in the direction of US onshore operations, which is interesting for you guys as an offshore company. Statoil in the last couple of years has been part of several newsworthy deals in the US market. Can you tell us a little bit about those deals and where you guys are focused in the US?
Stephen Bull: We started off our US business in the offshore environment in 2004, and we started in our Houston office. It was a natural movement from our deepwater operations in the Norwegian continental shelf to move over to the Gulf of Mexico. From 2008 onwards, we started to invest in the US shale business. We’ve been looking at the unconventional space for some time before that, looking at tight gas, looking at coal bed methane and also into shale. The deal that we struck there was in late 2008 with Chesapeake Energy where we acquired a third of their Marcellus acreage portfolio, which is about 700,000 acres to ourselves today.
From there, we really went to a learning phase. We started to build up an office in Houston and employed locals and expats that we could develop and build as a shadow organization and work with Chesapeake. In addition, we took out 12 Norwegians secondees who we basically sent up there with an SUV and a backpack, and they went up to Oklahoma City and sort of worked up there for two years learning all the technical disciplines from Chesapeake.
Matt: So everything started with 12 Norwegians hopping in an SUV and heading to Oklahoma?
Stephen Bull: Yeah, pretty much. Then, it’s grown from there. We now have nearly 1.2 million acres total in the US in shale, and that’s built from on top of the Marcellus acquisition and a partnership we have with Chesapeake. Then in 2010, we entered into the Eagle Ford, in which is a 50/50 joint development with Talisman Energy, a Canadian energy company, and that is a pathway to operatorship for ourselves where we expect to start operating starting out through into 2013.
The last sort of icing on the cake that we’ve seen from our developments in shale has been the acquisition of Brigham Exploration. That was in 2011, a big deal for us, a $4.7 billion acquisition. We took the whole company. I’m based here in Austin. We continue with our operations and our office in Austin, and we have 375,000 acres in the heart of the Williston Basin. We took on the whole of the operating organization and all the personnel. It’s been a very, very successful story for us so far.
Matt: It seems like you guys were — just starting in 2008 in the right place at the right time with the Chesapeake deal, and now, with oil prices where they are, getting into Bakken and getting your production ramped up at this point is definitely a good situation to be in. I guess this just begs the bigger question. Why is the world’s larger offshore operator, a Norwegian company, focusing its primary efforts onshore in the US?
Stephen Bull: For us, the onshore business a big part of our future investments for sure, and it’s a big driver for our North American operations. Remember, it is just part of the other aspects of our growth strategy. We still continue with exploration. We still continue to build new positions in about 3 to 5 bigger offshore clusters, and that builds on our deep water story. We’re the biggest international operator in Brazil. We have large production and acreage acquisitions that we’ve made in deep water Angola. We’re a very large owner in the Gulf of Mexico. We see a lot of more exploration upside in these different plays.
At the same time, we’re still developing and spending a lot of money in our Norwegian continental shelf. The Berents Sea in particular up towards the border with Russia in the Arctic has been a fantastic story for us with some high impact wells that we’ve realized over the last year and a half. Also, we’re seeing new partnerships as well with Russia that we’ll be developing into the eastern blocs of Russia as well offshore.
We’re still building a midstream and a downstream business as well. We’re looking at CAPEX investments of about $20 billion globally for the company. This is a big part of our business in the US onshore, a big driver locally, but it is part of a bigger picture of investments throughout the world.
Matt: It seems as if in 2011, Statoil restructured its focus a little bit, and that includes the US onshore operations. Can you explain how that pertains to the unconventional oil and gas shale plays that we’re seeing pop up sort of everywhere around the US?
Stephen Bull: Sure. Globally, we’re seeing positive developments in oil and gas prices in the future. We think that the outlook for the hydrocarbon energy business remains strong and good, and that when it comes to supply, we’re expecting about half of the world’s oil and gas resources will come from unconventionals. That could come from shale oil and gas, it could come from tight gas, it could come from tight oil formations, coal bed methane. It could even come from gas hydrates.
Having exposure and technology competence in the unconventional space is an important part of our strategy for developing in the rest of the world, moving outside of the US. But in terms of our US business, when we came in here, we saw that the growth opportunities were so large and our US business was so large that we actually split off the North American business from the international portfolio, so we have an executive vice president for the US. He’s an American. He sits on the corporate executive committee reporting to our CEO.
This is important for us because this really shows that we are a geoglobal company with — we’re a national company from Norway, but we have non-Norwegian nationals sitting on our corporate executive committee. We have another strategy group led by a British guy who’s based out of London. I think compared to other companies, you’ll see that we’re much more of an international flavor. The other part as to why we wanted to restructure is that we really want to learn and do this right in the US and really get the shale business exactly how we should be doing this.
Generally what we do in the company, when we feel we’ve mastered something, we want to take that technology, and we develop it over other areas. We do that in offshore heavy oil. We do it in our onshore operations in Venezuela and Canada as well, and this is what we expect to be doing here as well in our shale business.
Just to give you an example of that, Matt, we’ve got a new strategic co-operations with the Russian oil giant, Rosneft. Although a lot of this actually is in the Berents Sea, also there is an onshore dimension to this as well. There are some shale oil developments in southwest Russia in a place called Stavropol, and we actually have the cooperation and development thereto start drilling and exploring on behalf of Rosneft and ourselves. A few years ago, that would have been impossible for us, but now that we have the competence and the knowhow to do this, we’ll be spinning out these kinds of concepts around in the world a lot more in the future.
Matt: So not only are you learning while you’re increasing production here in the US, but you’ll be able to leverage that knowledge in some of your other international plays. Getting back to the United States, which of those US unconventional deposits do you see having the most potential?
Stephen Bull: The three areas we’re in: we’re in the Marcellus, dry gas; we have the Eagle Ford, which is liquids and condensate and NGLs; and we have the Bakken, which is pretty much a pure oil play, some gas as well and NGLs. With these three areas, we’ve got a pretty good acreage position, we must admit, and we feel we’re at the heart of those plays. I think all three of them offer something particularly interesting. First of all, all three really are the bottom of the break even curve. If you look along there, check with any investment back or with other analysts, and you’ll see that when it comes to break even costs, these are some of the lowest plays, particular for the Marcellus, the lowest gas break-even pricing as well.
Eagle Ford and the Bakken as well are excellent when it comes to break even pricing, so we feel that we’ve positioned ourselves in a pretty good area. Although gas prices remain weak today, we expect them to strengthen in the future. If you want to be in a dry gas play, then basically the Marcellus is the best play you could think of in North America.
Stephen Bull: There is a liquid upside as well. In West Virginia, in the panhandle, we’re developing with our partners Chesapeake so that we’re seeing a lot more NGLs. and that goes over towards Ohio and the Utica shale, Basically the northeast and the Marcellus in particular is potentially a massive powerhouse for the regeneration of American industry. We’ll see industrialization of hydrocarbons either going from gas to liquids or investments using simply gas based products.
Also potential to start getting pipelines out towards the Atlantic coastal markets, to actually switch out from the coal and in towards natural gas. The Marcellus is a leviathan of an asset. It really is. It has decades of drilling potential. The Eagle Ford is fantastically placed geographically so close to Houston and the gulf coast markets, so you get a very good price differential down there, and some pretty amazing wells and good growth prospects.
The Bakken is as well, which I personally am involved in pretty deeply here in Austin and also up in Williston at our office up there. The Williston Basin itself is much larger than we see, just around that North Dakota, around the Williston city itself. It goes up towards Canada as well. These assets keep giving back over time. They really do.
Matt: Yep. I guess just focusing right now a little bit more on North Dakota’s booming Bakken area, what makes Statoil’s position there unique?
Stephen Bull: Well, I think the presence that we got the in Bakken — as I mentioned, we got this through Brigham Exploration. Brigham itself is a well-known and reputable producer, it had a first class reputation as an operator in the area, and a real local presence as well in Williston that we’re very proud of. We’re gonna continue building on this work. We’re making a difference in the community there through two things. The first is the way we apply technology, and I think the second is our direct engagement in the community.
If you think of the technology aspect, which is important to our company, we’re investing in a huge pipeline network of over 700 miles of freshwater, saltwater and also oil as well. What’s important here is particularly that we have the oil terminals linked up to each other. That reduces the amount of trucking. Really the big thing here is actually the saltwater, which is the disposal water from the wells, and the fresh water that we’re using on hydraulic fracturing. Generally it’s thousands of truck loads that we’re just taking off the road in Williston by developing this pipeline infrastructure network.
We’ll be using this for our own operations, but also offering this to third party operators as well, so they will actually take some of the benefits of our infrastructure investments. Another part is that want to reduce flaring. We see flaring as an issue. From a Norwegian perspective, we have taxes on CO2. We have many initiatives from the government to reduce and cut out flaring on the North Sea. We can use similar techniques over here
Matt: And flaring, just for anyone that doesn’t know, that’s when you’re burning the natural gas off as a byproduct.
Stephen Bull: That’s right. You burn it off as a byproduct on the side as you’re producing your oil. Most operators don’t want to flare. We would prefer to actually put that into the pipe and sell it. We’re developing infrastructure networks and cooperating with a company called One Oak, which is developing a lot of processing capacity in the region, so we will be putting more and more of that natural gas and the NGLs from that natural gas into pipeline and selling it.
We want to try and commercialize this natural gas as well. Since natural gas prices are so low, we want to be using natural gas to create something called gas lift, where we’re pumping natural gas back into the well, into the vertical section. Instead of using pump jacks — you usually see the cliché of a pump jack all over those oil areas — we’re trying to work with natural gas to bring up the pressure there and to produce a lot more.
The other part is we’re using natural gas to develop some of our rigs. We can use natural gas to power locally onsite, so that means cutting diesel. Cutting diesel means cutting emissions. That’s the technology aspect of it. We’re working on some bigger plans on how to engage deeper in the community.
Just a few weeks ago, our manager of our Williston office was driving along through Williston actually seeing the amount of trash on the side of the highway. He said, “This is just such a mess. We’re closing the office.” They closed the office. They all went outside. They drove their own trucks. They pulled out some of their service supply companies as well, and they picked up trash all along the highway.
Stephen Bull: And it set off a chain reaction with other companies wanting to do similar kind of things, so all of the small stuff that we want to do in the community, we would like to develop into something a bit bigger as well.
Matt: Yeah, and I can sort of vouch for that from my side, especially in regard to Statoil. You guys seem like you’re leading a lot of the new technologies, and especially the environmental technologies like flare reduction and, like you said, using natural gas to actually power the rig. That’s great to hear. It seems like not only are we seeing new technologies to produce more oil and gas than we could ever have thought of five years ago, but we’re also seeing new technology and new innovation for protecting the environment. It seems like you guys are definitely leading the way in that.
Switching gears a little bit, talking about New York State, they’ve banned the shale gas development with a moratorium on fracking, but I’ve also heard rumors that New York City is set to be fueled by Pennsylvania’s Marcellus shale gas. Can you explain that situation in the northeast and tell us a little bit more about Statoil’s role there?
Stephen Bull: Yeah, sure. There remains a moratorium on hydraulic fracturing in New York State, and there’s a general environmental investigation impact assessment that they will be developing. It’s out for hearing at the moment within New York State. They’re taking it slow.
Generally in the northeast, Pennsylvania has been an interesting state where they’ve really tried to manage the differences between what is a sort of blue collar industrial aspect of Pennsylvania, and environmentally is a very sensitive area as well, so they’ve managed that in a pretty good way, actually, to develop the Marcellus, and it works well. We hope that there will be a similar situation to New York, but we’ll just wait and see with that. In the meantime, we have plenty of acreage to develop in Pennsylvania and West Virginia.
When we first looked into this business, our analysts — we have a large market analysis and trading hub in Stamford, Connecticut. When we all got together and we discussed how we see the fundamentals of the Marcellus in the future, our analysts looked ahead and thought, “Okay, there’s not enough pipeline in the area is one thing. You’re gonna produce a lot of natural gas. This thing is gonna get big. You’re gonna probably see some backing up here and also sort of excess supply in the area because the demand won’t take it.”
So what we thought, okay, generally as part of strategy in Statoil, we’ve always been happy to try and develop and find undersupplied high priced markets and put long term 20-year contracts together to get suppliers to build our pipeline systems for us. We identified two particular areas of growth. One was Manhattan — Manhattan Island, New York itself — and the other we saw in Toronto.
So within Manhattan, that’s pretty interesting because they only have one natural gas pipeline that crosses the river into Manhattan. That was constructed in 1958, and 50 percent of New Yorkers are getting their electricity from heating oil, which as you probably know has a very high CO2 content.
Matt: Yeah, and the price is quite high as well.
Stephen Bull: Absolutely, it is very high, compared to natural gas. So there’s 8 million residents there. It’s kind of a bottleneck market, so we’ve actually started development to get a pipeline through the river into Manhattan. That will be probably ready within about a year’s time.
The other project is the reversal of an existing pipeline from Toronto, which came down into the US. We’re seeing the natural decline of conventional natural gas production from Canada, so reversing this out into Toronto got us into a very profitable market. Toronto itself was one of the fastest growing cities in North America at the end of 2011. It had 132 high rise buildings under construction, and it still has huge growth potential, especially as natural gas is declining in Canada.
These kind of two areas are ones that we’re had the foresight to think ahead. We’re trying to do that for other areas as well, to get oil out of the Bakken and get that down into the gulf coast, and also we’ll be doing similar developments as well in the Eagle Ford.
Matt: So looking at the big picture, what’s your long term goal for production from North American unconventionals?
Stephen Bull: For the whole of our North American business, our goal is 500,000 barrels a day in 2020, and of that about 60 percent will be from our unconventional business here. That’s over a threefold increase on today’s production we’re expecting from the US.
Matt: So, in the coming year is there anything else we should be looking forward to from Statoil?
Stephen Bull: Yeah, absolutely. We’re gonna be developing our three continuing assets. We’d like to see more growth in the Bakken. We would like to grow that asset. We’d like to grow the Eagle Ford in particular. Something about the Eagle Ford is that we’ll be phasing ourselves into operatorship mode. We’ll be splitting acreage with Talisman, and we’re taking on operatorship ourselves in one of the areas there. That’s exciting for our organization to gear up towards operatorship and actually develop the technology that we would like to apply in that particular area and transfer that across the other areas we’re producing.
Also, I think we’ll see more deals. We’re looking at more and more acreage in North America. But you’re gonna see potentially more stuff from the international scene as well. I mentioned the cooperation that we have with Rosneft. We have other shale areas that we’re looking at globallyThe other part is that Statoil is not very well known in North America. We just have to admit that. We’re kind of one of the best kept secrets in the oil business. It’s a big company, but we want to be seen. We want to be known., I think you’ll be seeing a lot more of Statoil’s brand and name out there in the North American context this year.
Matt: I heard you speak a little while ago at a conference on developing unconventional shale gas. From that speech, you also were saying that by 2020, 12 percent of Statoil’s production will be coming from North American unconventionals. So when you look at that, it just seems like you guys are ramping up, and in particular at this timely point where it means a lot to get your foothold in the US market.
One thing that we always talk about at Daily Resource Hunter is how long is this boom gonna last? It’s sort of a new thing for all of us. Five years ago, natural gas prices were — well, it looked like we were gonna be importing natural gas, and now it looks like we’re gonna be exporting natural gas.
Not only that, but we’ve actually seen the declining curve of the US oil production. Instead of heading on that downward slope that we thought was gonna continue forever, it started to perk back up, and in the last couple of years it’s headed higher. So is this unconventional growth a flash in the pan or a true long term opportunity for American growth? What can we expect to see happening here just in the US long term?
Stephen Bull: This revolution we’ve seen with hydraulic fracturing and horizontal drilling and the application of new technologies has been an amazing turnaround. Previously, I’d worked in market analysis. You try and draw supply/demand curves and expect one to meet the other. And as we say, this completely blew everyone out the water. As you say, there were expectations of large LNG imports from Russia, Qatar, and North Africa to the US, and now we’re talking about exporting it eventually.
It has been an absolutely amazing revolution, and I think we’re still seeing the effects of that. 25 percent of our natural gas in the US is coming from shale. Another 20-odd percent is probably coming from tight gas. Coal bed methane has always been producing along, and we have a declining in conventional production. The last figures from the Department of Energy show expectations of 5 percent growth in natural gas demand.
Natural gas has made an amazing impact, even in a short space of time. The demand side doesn’t pick up as quickly as one would hope for, and that’s because generally we just see switching from coal to natural gas, but we could see new technology, new applications, in the long term. The US is sitting on an amazing resource here. It’s done a lot to bring the US out of a very tricky and difficult recession with very low energy prices and a sort of renaissance in investment from natural gas related industries.
When it comes to the oil side, we’re sitting with a Qatar basically or a Kuwait up in the middle of North Dakota. There’s only 500,000 barrels a day being produced out of the Williston Basin today. Expectations are that will easily go to 1, maybe 1.5, million barrels a day. It could be a brand new hub in that whole area for a new trading, a new position that you’ll see in the US. You could be referring that to actually the flat price as opposed to the WTI price today.
It’s not a flash in the pan. We see — and I see it. I run with the economics, and we can see that this works. The new and further application of technology and increased recovery rates means that this is gonna get better over time. How we crack the code with new shale plays will be interesting. Some of the new shale plays we’re seeing in the US, some of these Mississippi lime, the granite wash, there are many other shale plays already existing in California and others around in the Rockies as well.
It’s the size of these things. The business model that we need to have, if you’re gonna divert for smaller play, will have to have less time on experimentation. You need to know what you’re doing pretty much straightaway and actually start turning a profit as quick as you can to develop these resources in the right way. This is gonna be the kind of thing that we expect to win at as well. We expect any company that has a good grasp and understanding of technology and can apply that as quickly as possible with the technology partners in the market, they’re the ones we’re gonna see as the winners.
As I said, on the big picture, unconventional resources, there’s a huge amount of resources in the world from China to South America to Australia and Europe. Some areas are easier to develop than others because of above surface risk, but we’re thinking this shale revolution is here to stay.
Matt: That’s great to hear. You guys have been in the right place at the time, in terms of being able to leverage this technology. And it’s good to hear just from a specific company standpoint that the boom that we’ve seen over the last couple of years seems to be headed in the same direction. It’s creating opportunity for investors, and for companies like Statoil and just the American economy in general.
Stephen, I want to thank you for your time here. We appreciate talking to you.Source