Sentiment among oil and gas industry players is that major oil companies are too top-heavy with bureaucracy to compete against agile independents in shale plays, a resource opportunity that demands many wells be drilled with a fast learning curve to succeed. Shell is working hard to change that perception.

In June, Shell revealed its Unconventionals business, an autonomous yet integrated unit discreetly formed in January 2013 to squeeze out inefficiencies within the organization and operations and bring the vast resource potential of its shale portfolio to fruition on par with the economics enjoyed by independents.

That effort is led by Greg Guidry, a 34-year company man with broad experience in the upstream. He joined Shell in New Orleans in 1982, and prior to spearheading Unconventionals, led Shell’s European upstream and midstream gas supply operations.

Since taking over in 2013, Guidry has sold down half of Shell’s unconventional portfolio in what looked to outside observers like a wholesale exit, but shored up its core positions in the Delaware Basin, Appalachia, Canada and Argentina. The $70 billion acquisition of BG Group by Shell—targeted for its integrated LNG and deepwater assets—gave Shell collateral unconventional assets in the Haynesville Shale, which it had sold out of previously.

Today, Shell holds 12 billion barrels of oil equivalent (Bboe) resource potential, an increase of 7% since the division formed in 2013, and produces 270,000 boe/d from five basins, a nearly 40% increase—despite the paring of the portfolio and the budget for Unconventionals being cut essentially in half during that period.

“Our capital efficiency is such that we can now get a whole lot more done in a competitive fashion with $2.5 billion a year,” Guidry said.

While shales are the driving force in the Unconventionals unit, it also includes Shell’s in situ business in Canada, and Aera, a California heavy oil joint venture with ExxonMobil.

Guidry spoke with Investor on the company’s strategy for its unconventional portfolio.

Greg Guidry

Investor What’s the directive from the Shell executive committee regarding shales?

Guidry We see shale as a material part of the group portfolio. That said, the context of where it fits in that portfolio is important: It’s a future opportunity that we’re maturing for 2020 and beyond. The BG acquisition brought in substantial LNG and deepwater potential, which allows us the opportunity to make choices in what we fund near-term. The focus near-term is on deepwater and fully onboarding the LNG, as well as on the chemicals portfolio with the commitment to the new petrochemical complex
in Pennsylvania.

The positioning of unconventionals, the shales in particular, is to activate when we believe the price is right, and we can choose when to accelerate based on that belief. It’s characterized as a future opportunity for that reason.

Investor Is the move to focus on unconventionals a change in strategy?

Guidry It wasn’t a change in strategy; it was an effort to enhance our capability to be successful in unconventionals. We chose to not spin off or separate this business.

Think of it as an autonomous unit within the context of the broader Shell; not a spin-off, but as independent as it needs to be. Our vision is to be as nimble as an independent, while leveraging the capabilities of a major.

Investor What are these capabilities?

Guidry In terms of integrated value chains—think LNG, wet gas value chains in the petrochemical business, our trading operation—those are all integrated capabilities we enjoy. If we were to separate, fully optimizing those value chains might prove more difficult.

Another is scale: We often leverage our global procurement scale, sourcing from low-cost countries such as China and India, for example.

The last one is technology. We’re advantaged by way of our R&D laboratory, but also because of our access to human resources. Being able to move people in and out of the organization and staying connected to the laboratory becomes that much more difficult if you’re separate.

Investor How will you accomplish that?

Guidry We’ve been able to mitigate some of the complexity of being a major by taking the lead on developing standards for the shale business within the broader Shell that are very customized to our shale business. Our well engineering standard, our facilities standard and many of the other control framework elements that are not tailored to this kind of business have now been customized. We now have a fit-for-purpose approach that enables us to be more competitive in unconventionals.

We’re always working to find that sweet spot, knowing that we have to be more nimble than an IOC, while leveraging the strengths of an IOC.

Investor You’ve been able to slash overhead costs as well?

Guidry In dollars per barrel, our overhead has dropped 76% since 2013. Our organization is half the size it was, now 2,000 full-time equivalents less than when we got started. But our production has grown at the same time. The result of this simplification is a much leaner, simpler and more nimble business than what previously existed.

Investor Can Shell compete with independents in the shale space?

Guidry We can. And we have objective benchmarking information to verify that we already are.

Three or four years ago, there was skepticism that the IOCs could compete in this arena, not just Shell. Today, based on available benchmarking data that is limited in some basins, our well cost is highly competitive, with roughly 95% of our wells considered top quartile. We’ve actually grown production 40% with 60% less capital—a much more efficient drilling operation.

On the facilities front, we’re making the same kind of comparison. Now that we have a more fit-for-purpose standard, we are able to apply our engineering capability to innovate the industry standard.

If you look at our footprint in the Permian compared to what it was when we acquired the acreage in 2012, it’s so much simpler, because it’s been engineered. We took industry standards a step further to reduce the amount of equipment that we use, and it’s quite a bit simpler and more cost efficient than it once was.

Investor What’s different?

Guidry The previous approach was to separate, meter and ship individual streams from the well site, which required tankage and full separation. Shell has the ability to separate for metering at the well pad, sell the gas and then ship live oil and water to centralized facilities for processing. The footprint at the well site is smaller and more efficient—one vessel compared to a massive series of vessels and storage tanks.

So, again, it’s not just about the standard, it’s also applying the engineering expertise. It’s about allowing our engineers to use their skills to innovate the standard.

Investor In shaping your portfolio, what did you sell and why?

Guidry We sold our Pinedale position, our Haynesville Shale, all of our liquids in the Rockies, the Eagle Ford position, our Mississippi Lime LRS [liquids-rich shale] play, and large portions of Appalachia. We basically sold half of our assets, as measured by the number of acres, the number of producing assets and the number of active exploration plays. And we were very aggressive about it. We could see the softening of commodity prices starting to come upon us.

We sold everything that either was not Tier 1 or didn’t have the potential to be Tier 1. If it didn’t have the potential to generate high-quality wells, we did not want it in
our portfolio.

We reduced our footprint in half, generated about $4 billion in proceeds, and what we have left is high-graded. We feel very good about the portfolio we have.

Investor Over the past three years, Shell’s well performance has increased while drilling and completion costs have trended down 50%. How have you achieved that?

Guidry Execution has been enabled by the fit-for-purpose standard I previously mentioned plus a continuous improvement mindset that is most effective in our well delivery process. Well costs are 70% of our spend, so it was very much our initial focus. We’ve made tremendous progress in rig capabilities, and it helps that we are partnering with key suppliers that share our view when it comes to continuous improvement.

Another key piece is the actual performance of the well. We use an indicator that we call our “Big Well Metric,” which we measure using a 30-day initial production rate. The way we see it, if a well is not capable of delivering greater than 1,000 boe/d, then it’s not the type of well that’s going to lead to a successful shale. Initial performance is an indicator of the ultimate recovery. It’s not just about drilling a cheap well; it’s about drilling the right well.

Today, essentially 100% of the wells we’re drilling have big well potential. In 2012, only about 20% of wells coming online had that kind of potential, because we weren’t in the right shales.

Investor Is it your expectation to have 1,000 barrel-plus wells every time you drill?

Guidry Yes. We’ve reduced our capital spend by almost 60% since 2013, and our production rate is actually up. That’s because of these big wells. They’re cheaper and deliver a much greater yield than what we were able to achieve before.

Investor What’s the size of the prize to Shell in the Delaware Basin?

Guidry It’s just shy of 600,000 acres gross between us and Anadarko, in which we’re essentially 50-50 partners. We sold some of the peripheries, so now we’re down to about 540,000 acres, gross. That’s just high-grading, and we’ll continue to do that.

Our overall resource assessment is roughly 2 Bboe for Shell’s interest. That’s our current snapshot for the position, and it continues to grow.

We have not de-risked all of the benches in even the Wolfcamp, much less the overall sequence, and the industry has not, either. We see at least three possible Wolfcamp plays. It’s a very material resource.

Investor Where are you in the appraisal process?

Guidry We’re gearing up to begin moving segments of the holding to more of a harvest mode. Of course, we’re monitoring pricing; we’re not doing that in the absence of the right pricing. But from a technical perspective, we’re ready to move very substantial tranches to development over the next several months. We have just over half of the overall opportunity de-risked.

Investor Your position in Tioga County is not considered by most to be the sweet spot for the Marcellus as compared to northeastern or southwestern Pennsylvania. What’s happening with your assets in Tioga?

Guidry Tioga is actually a sweet spot for the Utica. The Utica holding is why we’ve retained the asset and doubled down when we took sole ownership. The ultimates [estimated ultimate recoveries] we see in the Utica Tioga area are very analogous to the ultimates being seen by industry in southwestern Pennsylvania. And we’ve got about 325,000 acres in that Tioga fairway. It’s 100% Shell, and the focus is on the Utica.

Investor Is there any activity there currently?

Guidry We continue to do appraisal drilling on the Utica position. We’ve got one active rig, and that rig is getting an awful lot done because the performance improvement is quite dramatic of late. We’ve got 17 wells online right now in the Utica. We’re learning a lot, and we’re quite happy with that position.

Investor Is it economic today?

Guidry The breakeven price of the opportunity there is below $2 per MMBtu right now, full cycle. That is quite competitive for a gas play in North America. We expect to see even further improvement moving forward.

But obviously, the industry issue in Appalachia is evacuation. It’s not the quality of the subsurface, or the overall breakeven price. The issue is pipelines or lack thereof, which is impacting the pace of the activity.

Investor Are the Haynesville assets from the BG purchase going to be a growth or divestment area?

Guidry Exco [Resources Inc.] is the operator there. It’s a quality position, considered Tier 1.

Some of the decision depends on where we go with LNG evacuation in North America, and some of that depends on the overall LNG market. We’re paying attention to integrated value chains, so it’s not a decision we’ll make in isolation. But in terms of our overall shale strategy, we would prefer to focus more on liquid mix and less on Henry Hub exposure, because we’ve got quite a lot of gas in our mix from our Canadian holdings and from Appalachia and now Haynesville.

Investor What is the impact of Shell delaying the final investment decision on its LNG Canada project for your Montney and Duvernay assets?

Guidry It really only affects the pace of development. Groundbirch is the anchor of our Montney position and the anchor asset for our LNG supply to western Canada. It just affects the pace of spending, but it doesn’t affect our overall holding. We’re working on making that a competitive holding in its own right, independent of an LNG choice. That’s the focus of the shale organization.

Life cycle breakevens now in the Montney holdings are comparable to the Appalachia holdings, around $1.75 per MMBtu. The trajectory of both of those continues to work its way down.

Greg Guidry, Shell executive vice president, Unconventionals, is molding Shell to be as nimble as an independent in the shale plays while leveraging the unique capabilities of a major.

Investor The perception is that Canadian gas is at the wrong end of the pipe and therefore takes the biggest hit on differentials. Can Canadian gas be competitive?

Guidry It’s more of a challenge, but not so unlike what we are seeing in the Northeast U.S. in terms of evacuation.

Investor Where do you stand with the appraisal of the Vaca Muerta Shale?

Guidry The technical characteristics of the Vaca Muerta going in were very attractive, and they remain so. We’ve been able to confirm some of our assumptions, and to sort out what are some of the most attractive layers in the overall shale.

We hold about 275,000 acres in Argentina, including an operated position and a nonoperated position [with Total]. We’ve got 16 operated wells and are still in the de-risking phase, but we’ve seen enough to be encouraged. In terms of industry benchmarks, including YPF [Argentina’s state oil company], we’ve got four of the top 10 wells, with only 16 of the 500 wells drilled.

The key now is long-term production performance. We committed to building a substantial early production facility, which will start operating later this year. Once complete, we’ll be able to get long-term production tests out.

Investor What do you see as the key technical challenges that still face unconventionals?

Guidry Getting the recovery efficiency up from single digits to double digits. The technical challenge there is effectively stimulating rock volume in a predictable way, and minimizing the number of wells it takes to maximize that stimulated rock volume. That is a spacing optimization question and a frack optimization question—being able to control the behavior of the frack process such that we are confidently stimulating only targeted rock.

More advancement needs to take place so that we can take some of the trial and error out of it and get more into prediction and modeling like we’re doing in deepwater. We should only be drilling the number of wells required to maximize that stimulated rock volume. That is the nirvana we’re all trying to achieve.

Investor Do majors have a technology advantage over independents?

Guidry My belief is yes. History has shown that it’s the laboratories of the majors that bring the breakthrough technologies, the kind that can challenge and reconfigure supply chains.

And because the majors were late to the shale game, we’re just getting started on an immature opportunity. We’ve been in LNG for 60 years, deepwater for 40 years and liquids shale for less than a decade. It’s still early days, and breakthroughs are still coming in the technologies that we’re applying. These are exciting times.

Investor Are you done with divestments within the Unconventionals division?

Guidry The shaping moves are done. We’ll continue to high-grade and make bolt-on acquisitions where it makes sense. Our
preference is to do more swaps with less capital outlay.

Investor Any intent to expand in other North American basins?

Guidry We’re not in every play, and we have no intention of being in every play. We just want to have a very competitive position in the plays we choose to be in. The preference is to bolster the Tier 1 positions we have as opposed to starting anew. We feel we can build more value by doing that in a more cost-effective way, as opposed to jumping into a play we’re not already in.

Investor From a global perspective, do you see any hot spots for unconventional shale that might entice Shell?

Guidry As I mentioned, Argentina is home to attractive shale, and there are opportunities to expand our footprint there. The government is putting incentives in place to stimulate more gas activity, and that’s helpful. If the conditions are right and are stable, that would cause us to think seriously about growing our position in Argentina.

However, most other shales in the international space, particularly given commodity pricing, are a very tough proposition. We’ve actually halted our international activity in shale outside of coal-seam gas activity in Australia and minimal activity in China. All the other activity we’ve had, including Ukraine, Turkey, South Africa, even in Russia, has virtually been halted.

Investor What’s the future of majors in shale plays?

Guidry A few years ago, the perception that IOCs were having a hard time being competitive in the shales was true, but that is no longer the case. Our operational performance is very competitive, and that’s not exclusive to Shell. To a capable major with a significant R&D budget, shales present a material and meaningful opportunity.

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