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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.  Note:  all the production profiles and economics presented below come from EVAL (Economic Valuation Assessment Lens).  This is the economic analysis program we (Energy Consulting Group(ECG)) developed to be accuracte and easy-to-use.  It has been tuned specifically with non-conventional assets in mind.

Exhibit 1:  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
 
Potential Well Level Production and Recovery Profiles
Light, Tight Oil Play
Potential Well Level Production and Recovery Profiles

Potential Well Level Net Revenue Profile
Light, Tight Oil Play
Potential Well Level Net Revenue Profile
Potential Well Level Net Cashflow Profile
Light, Tight Oil Play
Potential Well Level Net Cashflow Profile
 

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 understand is 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 considerable attention is the typical decline profile of shale play (see Exhibit 2).  The defining feature is the relatively high initial decline rate in comparison with "conventional" sandstone and carbonate plays (see Exhibit 3).  However, a subtle transformation can take place over time, when we expect the high initial declines to transform into lower decline rates over the long term,.  These lower, longer term declines mean that after a handful of years, many shale wells will likley 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
Exhibit 3:  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 potentially high initial rates.  So, while the initial decline rates can apporach 70%-80% over the first year of production, high starting rates in successful plays, such as in the Permian, Appalachian, East Texas, and Williston Basins, can more that compensate.  In turn, the higher rates can lead to enough production during the critical first four years of production, to economically justify shale wells, though other factors such as oil and gas pricing, well costs, etc. also factor into the economic results.

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 frack treatments.  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 using "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. 

Illustrative 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
 

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, overhead, facility costs, etc.  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 illustrate this point, 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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International Energy Agency
Oil Market Report

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Department of Trade and
Industry -UK , Oil

Norwegian Petroleum
Directorate-Norway

National Energy
Board-Canada

Pemex

Ministry of Industry and
Energy-Russia

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