The Alpine High: A Big Deal Last September, An Even Bigger Deal Today
Mar 2, 2017 @ 11:24 AM Every new oil and gas play goes through a very predictable evolution, from discovery, to evaluation, to development, to production and finally to abandonment. Each phase of this evolution is distinct, involves specific steps and activities, and most often takes years to complete. For publicly traded companies, each phase of this evolution brings with it not only a specific set of operational challenges, but a specific set of communications challenges along with it. Oil and gas operations constitute a very arcane subject, the technical aspects of which are not easily understood by investors, analysts, reporters and others who are not involved in them in their daily lives. The challenge for the company as it goes through the evolution of its play area is to inform and educate its various audiences in a way that prevents misunderstandings from coming up in the media and the marketplace. Apache Corporation recently experienced such a misunderstanding related to its massive Alpine High play area in the Delaware Basin of West Texas. When I interviewed Steve Keenan, Apache's Senior VP of North American Unconventional Resources, about the Alpine High last September, he was very careful to point out that the company was in the evaluation phase related to the play area, as I wrote at the time: How The CFO Can Take Control Of Transaction Processing We should also note that the wells drilled thus far involve short-ish horizontal laterals of 4,000 feet, and comparatively small hydraulic fracturing treatments. As the field is further delineated, the horizontals will become longer and the frack jobs more extensive. Apache thus expects the well economics to improve and the reserve estimates to grow over time. The company had released the results of nine such evaluation wells it had drilled to that point at a Barclay's conference, and the media and markets all appeared to understand the nature of these wells and the evaluation phase of development the company was in at that time. Not surprisingly, Apache remains in the evaluation phase related to the Alpine High today, six months later. It's a big field located beneath a large geographical area, and will require quite a few test wells designed to evaluate the rock and delineate the extents of the resource. Unfortunately, when Apache CEO John Christmann discussed the results of five more evaluation wells at a Credit Suisse conference a few weeks ago, some in the media got the story wrong. There followed a series of confused reports , citing analyst claims that the results from these additional wells were disappointing, and not at the same level as the results from the wells the company had revealed in September. Mr. Christmann made an effort to correct the record in the company's 4th quarter earnings call, but still the reporting on the Alpine High seemed confused, so I felt it would be good to talk with the company's VP of Inverstor Relations, Gary Clark. "If anything, we're even more enthusiastic about (the Alpine High) than we were" in September, he said when I asked him about reports of 'disappointing' results. "You really can't compare these test wells to each other. These are wells with small fracs, short laterals - test wells designed to prove the concept, and provide information about the hydrocarbon column." In other words, trying to compare the results of one discreet group of evaluation wells to another is your basic apples to oranges enterprise. One is not going to feel, smell or taste like the other, and there are good reasons why. Even though the Alpine High resource sits geographically beneath the same land into which previous operators have drilled for many decades, it is in fact a new field in terms of the hydrocarbons being targeted. Because of this, one must view the Alpine High through the same lens used to view major new resource plays like the Eagle Ford Shale in Texas or the DJ Basin in Colorado. The evolution of the Alpine High today sits at about the same place as the Eagle Ford Shale sat in mid-2010 , when operators in that area were drilling test wells involving 5-stage frac jobs and 3,000' foot horizontal laterals, and were issuing celebratory press releases announcing oil wells that tested at initial flow rates of 1,000 barrels per day (bpd). Today, Eagle Ford operators are drilling wells with 2 mile or more laterals, frac jobs involving 30 or even more stages, and would want to commit harikari if a new well in the fairway of the play tested at only 1,000 bpd. Another aspect to consider is that, in 2010, most Eagle Ford natural gas was being flared, with very little recovery of natural gas liquids taking place due to a lack of pipeline and processing capacity. As these midstream assets have come online, flaring has been dramatically reduced, and recoveries from natural gas wells have increased accordingly. Similar constraints exist in the Alpine High area, and, as Mr. Clark put it, "you can’t optimize pressures and flow rates until you are free-flowing into a transportation system. You also can’t recover all of your NGLs until that happens." The good news is that Apache expects the build-out of its midstream system for the Alpine High to be completed around mid-year. Once those assets are in place and operational, flow rates from the already-existing wells will be able to be maximized, and the company will then be able to begin moving more into its development drilling stage, involving longer laterals and more extensive frac jobs. The key thing to remember about the Alpine High is that, to this point, the company has released data related to fewer than 20 evaluation wells related to a massive resource play that will most likely ultimately involve the drilling of several thousand wells. Far from being disappointed, Mr. Clark says "the company has more confidence in a higher number of potential wells and scope of the resource based on initial testing phase." Bottom line: Reports of the demise of the Alpine High have been highly exaggerated. If it was a big deal last September, it's an even bigger deal today. (Disclosure: I do not own any stock in Apache Corporation, and have no financial interest in the success or failure of the company's operations.) Follow me on Twitter at @GDBlackmon @octgpro https://www.forbes.com/sites/davidblackmon/2017/03/02/the-alpine-high-a-big-deal-last-september-an-even-bigger-deal-today/#4382af4a5d51
