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Economics of North American Oil and Gas Shale Plays
===========================================================================================================================================================

Oil and gas shale plays have transformed the North American oil and gas industry (see Exhibit 1, for play index map), and look increasingly set to transform the global oil and gas scene, as more and more developments outside NA emerge, whether they be the Vaca Muerta in Argentina, shale gas in Sichuan, China, or the shale oil in the Bazhenov shale in Russia

Map of Selected USA Light Tight Oil and Shale Gas Plays
Map of Selected USA Light Tight Oil and Shale Gas Plays
Click Image for Larger Version
 

However, to appreciate the full potential of this revolution, we have to understand the economics of shale plays, and how those economics relate to other plays. The first thing to appreciate are that the drivers of shale play economics in North America differ significantly from historical onshore plays in several key ways:

1)  Decline profile:  The most obvious characteristic and the one that garners the most attention is the typical decline profile of shale play.  The most obvious characteristic is the relatively high initial decline rate in comparison with "conventional" sandstone and carbonate plays (see Exhibit 3).  However, a subtle transformation takes place over time, when the high initial declines transform into low, long term declines, sometimes referred to as terminal declines by the industry.  These low, longer term declines mean that after a handful of years, shale wells turn into long lived, low cost cash cows.

Generic Horizontal Shale Gas Play Production Profile
Generic Horizontal Shale Gas Play Production Profile
Click Image for Larger Version
Generic Vertical Tight Sand gas Play Production Profile
Generic Vertical Tight Sand gas Play Production Profile
Click Image for Larger Version

2)  Prolific Initial Rates:  Offsetting the high initial declines are the relatively high initial rates.  So, while the initial decline rates can apporach 70% for the first year of production, high starting rates in successful plays, such as the Marcellus, Eagle Ford, and Bakken, more that compensate.  In turn, the higher rates lead to enough production during the economically critical first four years of production, to economically justify shale wells, though other factors such as oil and gas pricing, well costs, etc. need to be factored into the economic analysis.

Production Profiles for 4 Different Companies From One Area of One Shale Gas Play
Production Profiles for 4 Different Companies From One Area of One Shale Gas Play
Click Image for Larger Version
 

3)  High Well Costs:  The two technologies behind the shale revolution are horizontal drilling and large, multi-stage fracing.  This page is not the place to discuss each of these in detail except to note that they are much more expensive than either drilling a vertical well, or "conventional" completions.  In short, successfully applying these technologies costs about 3-5 times as much as a conventional well of similar depth in the same area.  To illustrate this point, please look to the exhibit titled, "Drilling Cost Segmentation", which is a breakdown of cost categories for drilling and completing an average well in one of the major shale plays.  What is notable is the dominace of the fracing (pressure pumping) costs. 

Drilling Cost Segmentation for a Shale Well in One Particular Play
Drilling Cost Segmentation for a Shale Well in One Particular Play
Click Image for Larger Version
Selected Examples of Drilling and Completion Cost Trends for US Shale Oil Plays
Selected Examples of Drilling and Completion Cost Trends for US Shale Oil Plays
 Click Image for Larger Version

These three features are the key defining factors when considering well level economics for a shale plays.  Please note, however, these are not all inclusive.  This discussion is intentionally leaving out references to leasing costs, operating/processing/transportation costs, and overhead and facility costs.  We do this not because they are not important, but because they are typically not as central (though there are exceptions, especially regarding processing/transportation fees) to defining well level economics. 

Another point to make is that the economics can vary considerably from play-to-play, or even within a play.  The next three slides make this point well, and also show sensitivity of some of the more prominent plays to variations in oil and gas pricing.  The final slide is a supply curve showing the not only approximate volumes of supply at different price points, but also how the economics of different types of plays potentially compare to one another.

Before Income Tax (BFIT) ROR Sensitivity for Selected North American Oil Shale Plays
Before Income Tax (BFIT) ROR Sensitivity for Selected North American Oil Shale Plays
Click on the image for higher resolution version of the map.
Before Income Tax (BFIT) ROR Sensitivity for Selected North American Wet Gas Shale Plays
Before Income Tax (BFIT) ROR Sensitivity for Selected North American Wet Gas Shale Plays
Click on the image for higher resolution version of the map.
Before Income Tax (BFIT) ROR Sensitivity for Selected North American Dry Gas Shale Plays
Before Income Tax (BFIT) ROR Sensitivity for Selected North American Dry Gas Shale Plays
Click on the image for higher resolution version of the map.
North American Natural Gas Supply Curve

North American Natural Gas Supply CurveClick on the image for higher resolution version of the map.

 


 
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