Guest “you can’t win them all” by David Middleton
Apache calls it quits on Alpine High after $3 billion charge
Rachel Adams-Heard, Bloomberg, Thursday, February 27, 2020
Apache Corp. is officially calling it quits on a highly publicized but disappointing shale discovery in West Texas after vehemently defending the prospect for about three years.
The Houston-based company posted a roughly $3 billion writedown on its Alpine High project, a find from 2016 that fizzled when it turned out to hold more natural gas than oil. Apache will instead focus on offshore riches in Suriname, where the explorer recently struck crude and enlisted French oil titan Total SA as a partner.
“Apache has no current plans for future drilling at Alpine High,” Clay Bretches, chief executive officer of Apache’s pipeline spinoff, Altus Midstream Co., said in a statement.
The Alpine High was announced in September 2016 to much fanfare and claims the field held 3 billion barrels of crude and 75 trillion cubic feet of gas. But it quickly became apparent that that corner of the prolific Permian Basin was far richer in natural gas and its byproducts than more-valuable oil. The Alpine High became even more worrisome for investors as gas supplies in the region ballooned and prices cratered.
Part of the problem is the news media’s consistent conflation of resources & reserves, field & plays and fields & basins. The assumption seemed to be that Apache had discovered a giant oil field with proved reserves of 3 billion barrels (Bbbl) of oil and 75 trillion cubic feet (Tcf) of natural gas.
Apache discovered a giant oil field in Texas and its shares are leaping
Swetha Gopinath and Ernest Scheyder, Reuters Sep 8, 2016
Apache Corp announced a major oil discovery in Texas on Wednesday, the latest sign the strongest shale companies are not only surviving the steepest price crash in a generation, but growing despite it.
Apache’s shares spiked as much as 14 percent to $58.99 in early trading after the company said it had assembled contiguous parcels of more than 300,000 acres for $1,300 an acre in the field it calls “Alpine High,” most of which is in Reeves County, Texas.
Apache estimated that its acreage holds about 75 trillion cubic feet of mostly wet gas and 3 billion barrels of oil in the Barnett and Woodford regions of the field. It also said there is significant oil potential in the shallower Pennsylvanian, Bone Springs and Wolfcamp formations.
The company cautioned that it has yet to determine the precise boost to proved reserves.
“This really is a giant onion that is going to take us years and years to peel back and uncover,” Chief Executive Officer John Christmann told analysts at a Barclays conference on Wednesday.
“This is a world class resource. You’ve got reservoir consistency, continuity, which is going to lead to very repeatable and predictable drilling results and targets.”
Apache said it has identified 2,000 to 3,000 drilling locations that can make money at $50 a barrel oil and $3 per thousand cubic feet of natural gas. The field has just 19 wells on it now.
To move product to market, Apache needs to install gas processing infrastructure in the field, beginning with temporary capacity in the second half of this year.
“Alpine High” may very well, still be “a world class resource”… The problem is that it was mainly a gas resource in 2016. 75 Tcf of natural gas is the Btu equivalent of about 12.5 billion barrels of oil, or 12.5 billion barrels of oil equivalent (BOE). 80% of the resource was gas and apparently, the more they drilled, the gassier it became. Since 2016, the benchmark price of natural gas has rarely topped $3 per thousand cubic feet (mcf).
And Permian Basin natural gas prices are much lower than the Henry Hub benchmark.
Natural gas spot prices at the Waha hub in western Texas, located near Permian Basin production, settled at $1.55/million British thermal units (MMBtu) on August 15, the highest price since March 2019. This price increase coincides with the 2 billion cubic feet per day (Bcf/d) Gulf Coast Express Pipeline (GCX) preparing to enter service. GCX will provide much-needed additional natural gas takeaway pipeline capacity from the Permian region of western Texas and southeastern New Mexico.
Limited natural gas pipeline takeaway capacity from the region has kept prices very low, or even negative, in recent months. During the first eight months of 2019 (through August 19), the Waha spot price averaged just 65¢/MMBtu. The Waha spot price has been consistently lower than the Henry Hub spot price—the national benchmark price for natural gas.EIA
Furthermore, resources aren’t reserves. Apache’s 15.5 billion BOE was the estimated oil & gas in place, not the recoverable oil & gas.
Apache’s “giant oil field” discovery had long been recognized as a potentially massive “shale” gas resource.
LOWER 48 EXPLORATION: ALPINE HIGH
Questions about this new discovery abound—as do the barrels of oil equivalent in place. Here is an introduction to the Lower 48’s newest resource play.
Nissa Darbonne, Editor-At-Large
In a 2006 paper, Denver-based consulting firm The Discovery Group Inc. reported that the Barnett Shale potential of the southern Delaware Basin may contain 800 trillion cubic feet (Tcf) of gas across a 12,000-square-mile area. Bob Cluff, the firm’s late founder, said that “Reeves County is the gas-in-place sweet spot.”
At the time, at least a dozen operators were examining the Barnett and underlying Woodford Shale’s potential in the heat of horizontal Barnett success in the Fort Worth Basin. Soon, many turned their capex to other promising unconventional-resource plays, however: the Bakken, Marcellus, Haynesville and Eagle Ford.
Cluff concluded about the Delaware targets, “Whether this shale can actually deliver gas at commercial rates remains to be seen… [It] will take at least 50 wells before industry knows if it can deliver like the Fort Worth Basin’s Barnett.”
The play resurfaced in early September with Apache Corp.’s announcement that it had zeroed in on the sweet spot, calling it “Alpine High,” and that it has a plan for monetizing it. John Christmann, CEO and president of Apache, told Investor that a newly recruited team—led by Steve Keenan, formerly an exploration manager for EOG Resources Inc.— joined Apache in 2014 to look for new resource plays in the Lower 48.
Preliminary indications were that the Alpine High region, unlike the rest of that part of the Delaware Basin would be in the oil window and have lower clay content… making for an ideal “shale” oil play.
But, Apache mostly found gas…
Apache CEO Shares Insight On Permian’s Alpine High
Perceptions have changed for the better for the emerging oil and gas play as activity increases and others move into the neighborhood.
Velda Addison, Hart Energy
HOUSTON—When Apache Corp. (NYSE: APA) stepped into the Delaware Basin’s Alpine High area in 2015, the company’s perceptions did not come off as a ringing endorsement: complex geology with uneconomic dry gas, infrastructure assets with minimal value and a lack of endorsement from the industry.
But today’s reality, as outlined by Apache CEO John Christmann, has put those prior perceptions to rest.
“What we’ve proven today is we’ve got 6,000-ft column and multiple targets, high BTU gas and improving oil production as well and there is a lot of wet gas,” Christmann told a crowd gathered for RBN Energy’s PermiCon. “We now have decades of high-return inventory that we are excited about.”
Apache’s vertically-stacked emerging oil and gas play sits in the Delaware Basin, mostly in Reeves County, Texas. The company announced the discovery in September 2016, estimating 75 trillion cubic feet of rich gas and 3 billion barrels of oil in place in the Barnett and Woodford formations plus potential in the shallower Pennsylvania, Bone Springs and Wolfcamp formations.
Apache exited July with a net production of about 54,000 barrels of oil equivalent per day (boe/d) at Alpine High. By 2020, that is expected to climb as high as 180,000 boe/d, with between 350 and 375 wells on production and between 425 and 450 wells drilled. The company plans to run between 10 and 11 rigs.
In September, rich gas processing capacity for Altus Midstream was at 380 million cubic feet per day (MMcf/d) and lean treating and compression at 400 MMcf/d. If all goes as planned, this will increase to about 1,300 MMcf/d and 480 MMcf/d, respectively, with five cryogenic processing plants operational by year-end 2020 as Alpine High transitions to full-field development.
Apache has focused most of its drilling and testing in the Northern Flank, primarily because of the way its lease was set up, Christmann said. “The rest is along the bottom of the Woodford because we had to drill down to the base of the Woodford to hold the acreage.”
Going forward, the company will move up the column and into more of the wet, richer gas and oil, he said.
“It’s a very, very large resource. What makes it unique is in this area of the Delaware, the Woodford and the Barnett are windows that are wet gas and oil generating,” Christmann said. “As you move farther east the Woodford and the Delaware subside away,” giving way to a deeper dry gas type of setting, he added.
As of the end of July 2018, Apache’s production was about 54,000 BOE/d… But their rich gas processing capacity was over 60,000 BOE/d (380,000 Mcf / 6). It’s pretty clear that most of the production was gas. Even with a decent liquid yield, Permian Basin gas is pretty well worthless, with prices often falling below $0/Mcf. This is why so much Permian Basin gas is flared.
In this business, large discoveries are usually the result of “thinking out of the box”, like Apache did here and Shell did in the Chukchi Sea. Occasionally, this will lead to a major discovery that everyone else missed… Here in this office, we call these Unicorns… It’s actually our company’s unofficial mascot. And it appeared that Alpine High might have been a genuine Unicorn.
Meanwhile, Mike Kelly, senior analyst for Seaport Global Securities LLC, wrote that some doubters “question how Apache’s knowledge of the acreage could be superior to its surrounding Permian peers.” From meeting with Apache management, Kelly and the SGS team found that it is the only operator that has shot 3-D seismic over all of the leasehold and pulled core.Hart Energy
However, most of the time, it turns out that the consensus was right… And Alpine High turned out to primarily be a gas resource. There isn’t always a pony in the pile of horst schist under the Christmas tree.