Growth in unconventional oil production will be increasingly important for U.S. energy supply, according to Greg Hill, Hess Corp.'s executive vice president and president of worldwide exploration and production. He shared his views in an exclusive interview after his opening keynote address at Hart Energy's 2011 Developing Unconventional Oil (DUO) Conference in Denver.

Hill's plans for growing and diversifying Hess focus on balancing its conventional and unconventional opportunities in the world's best oil and gas basins, while operating marketing and refining assets for near-term return and cash flow.

Hess tapped Hill in January 2009 to manage a growing portfolio that blankets the globe at every stage of exploration and production. Before joining Hess, he served Royal Dutch Shell as executive vice president, Asia Pacific exploration and production, and prior to that, he held numerous executive roles in European and U.S. onshore and offshore production.

In the conventional space, the Hess portfolio includes numerous offshore fields in the U.S. Gulf of Mexico, Norway, Denmark, the United Kingdom, Equatorial Guinea, Indonesia, Thailand, Malaysia and Azerbaijan. Major offshore exploratory areas are the Gulf, Australia, Ghana, Indonesia, Malaysia and Egypt.

At press time, Hess announced the Paradise-1 exploration well in the deepwater Tano/Cape Three Points license offshore Ghana. The well encountered an estimated 490 net feet of oil and gas condensate pay over three separate intervals.

Onshore, Hess holds interests in Libya, Algeria, Russia and the U.S.

Hess Corp. executive vice president and president of worldwide E&P Greg Hill has been rebalancing the portfolio to give investors “a little more certainty on the growth curve, while still giving them the beta or the upside associated with high-impact exploration.”

In the unconventional space, Hill wants to capitalize on the firm's rapidly unfolding success in U.S. tight-resource plays by leveraging unconventional technology and know-how to overseas opportunities.

Hess has developed a profit-enhancing, lean manufacturing approach and an advantaged infrastructure position in the Bakken shale play in North Dakota. Hill said the company's approach should enable the firm to meet a 35% compound average growth rate and a production target of 80,000 barrels of oil equivalent (BOE) net per day by 2015 from its legacy acreage there. Hess made several acquisitions in 2010 that will add further production to this target.

In addition to 900,000 net acres in the Bakken, Hess manages more than 100,000 acres in the Eagle Ford shale in Texas and in excess of 1 million gross acres in the Paris Basin, where political and environmental concerns have delayed the company's 2011 drilling program for oil shale. Hess also has interests in more than 2.5 million acres in China in three emerging unconventional, joint-study areas.

Further out, Hess has lined up interests in more than 6 million partnership acres in Australia's Beetaloo Basin, where seismic shoots are scheduled to begin in 2011.

Investor: Why is unconventional oil critical for the U.S.?

Hill: Start with energy security. How many presidents have said we are addicted to foreign oil? That's true. But for the first time in decades, U.S. oil production is on the climb, and unconventional oil growth is going to be increasingly important. We believe up to 40% of U.S. onshore liquids production will come from unconventionals by 2015.

Of course, the U.S. is the most mature of the plays globally. There is an advantage in regions with production experience, for instance in the Eagle Ford trend in Texas, where we are producing in the liquids-rich condensate zone, versus the Paris Basin in France or the Beetaloo play in Australia.

Investor: What factors into Hess' acquisitions of unconventional assets?

Hill: First, we look at fundamental geology. If you don't get the rocks right, the rest doesn't matter. Secondly, we look at geopolitical "aboveground" risk. You really have to think hard about doing business in certain places, and what risks may emerge that could ultimately affect economics.

For example, in France, we knew that the public perception was a risk we were going to have to deal with, so we kept our initial entry costs low and our time frames long.

Third, we consider the commercial construct. That includes infrastructure, which is really important for unconventional plays. Producers need access to reasonably priced infrastructure for take-away.

Investor: Which interests you more: unconventional oil or natural gas?

Hill: In the U.S. we are more interested in and prefer the oily or condensate plays, because of the obvious pricing advantages versus natural gas. In other parts of the world, we are interested in either oil or gas—particularly in Asia, where there is a strong market for natural gas.

In the long term, we are bullish on U.S. natural gas prices, meaning we expect long-term gas prices to exceed $6 per million Btu; therefore, we may at some point choose to invest in U.S. unconventional gas as confidence increases in long-term prices.

Investor: How does Hess prepare its oil and gas forecasts?

Hill: We use numerous outside sources of information, but we perform our own scenario planning and strategy work to build proprietary supply, demand and pricing models in an internal research group. Based on our understanding of the fundamentals of oil and what is driving demand, we don't see anything structurally that will cause extended downward pressure on oil prices in the long term.

Investor: What does Hess see as the most important demand driver?

Hill: China and India. I've spent a lot of time in China, in particular in the past five years, and it's incredible to see what is happening in that part of the world. China is growing its economy at a healthy rate—which the developed world should support, as millions of people move out of poverty. But with that middle-class growth comes significant energy consumption.

China is also trying to balance this healthy growth with increasing pollution from coal-fired energy. Therefore, they are trying to secure energy from all sources (including unconventionals), but in particular they want to increasingly displace coal where possible with domestic unconventional natural gas.

Investor: Your DUO keynote address mentioned lean manufacturing. How does that work in unconventional resources?

Hill: We started lean manufacturing in the Bakken over two years ago. We are seeing productivity gains of 25% to 30% on nearly everything we apply it to.

One simple example is pad drilling. We drill, complete and produce all on one pad. We've been able to cut spud-to-well-on-production cycle time by 20% to 30%, in most cases.

In these high-activity developments, there is a lot of motion, transportation, handoffs and white space—and that spells waste. If you analyze that in detail, you can make a significant impact on cost structure and productivity. It's not easy to do, but the prize is worth it.

Investor: Does the market view Hess more as an exploration or a production play?

Hill: More of a balanced play. Before I arrived in 2009, the company was viewed largely as a high-impact explorer. What I've been doing is rebalancing the portfolio to give investors a little more certainty on the growth curve, while still giving them the beta or the upside associated with high-impact exploration.

Investor: How do unconventional resources play into that?

Hill: We have rebalanced and shifted a certain portion of our investment dollars into unconventional plays because of their scale, scope, predictability and time frame. By doing so, we can now offer investors a fairly predictable 3% minimum growth over the long term. Then, with greater upside from the unconventionals and continued exploration in high-impact offshore areas like Ghana and Semai, investors are offered the optionality of significantly higher growth rates. We think this is a unique and powerful combination.

Investor: Has visibility dimmed for offshore production?

“You really have to think hard about doing business in certain places, and what risks may emerge that could ultimately affect economics.”

Hill: Presumably you mean the Gulf of Mexico. The timing of new deepwater production there is definitely sliding to the right on the calendar. Although deepwater production will remain extremely important to the U.S. because of its scope and scale, it now has an even longer time frame for development as a result of Macondo. This will tend to favor unconventional plays, because they offer similar scope and scale yet can be produced more quickly.

Investor: Is the rightward Gulf schedule shift a secular phenomenon?

Hill: Generally, yes. Permitting times and costs will go up. There is major opportunity for improvement in the new process, however, as it is not very efficient.

Basically, an operator submits the permit, a few questions are raised (for which answers must be prepared), then the operator resubmits and goes to the back of the queue again. This process repeats itself multiple times until you receive your final approval. It's not the individuals involved; it has to do with the number of new requirements that are unclear, coupled with the BOEMRE (Bureau of Ocean Energy Management, Regulation and Enforcement) being overwhelmed and understaffed.

Investor: Is no-go or slow-go the new normal for the Gulf?

Hill: I am an optimist. We will work through it as an industry, but it will take several years to become efficient again. The industry now has well-containment systems in place, so that's not a barrier going forward.

Investor: Will Hess be among those separating upstream operations from mid- or downstream?

Hill: No, that's not for us. If you dissect our business, the refining and downstream segment is a very small part of capital employed. We are almost 90% E&P. Hess has been in refining a very long time, so we understand refinery boom-and-bust cycles. We're in a bust cycle right now, so we are just trying to keep the refining operation neutral.