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Permian Basin:  King of the Oil Shales (includes detailed frack history of perforating depths, pressures, and volumes by stage for a 50 stage well) USA Natural Gas Supply/Demand Fundamentals (what it means for North American gas prices)
Fracking Technology, Demand and Economics US Shale Oil and Shale Gas Drilling Activity: Rig Activity Trends and Maps
Oil Supply/Demand Fundamentals Saudi Arabia Oil and Gas Industry (Aramco); Saudi Arabia:  Ghawar-The World's Largest Oilfield
The Energy Consulting Group's Expertise with the Digital Oil Field Global LNG Supply/Demand Balance

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

Once you understand the economics of the oil and gas upstream industry, understanding the industry becomes easy.

Oil and gas shale plays have transformed the North American oil and gas industry (see Exhibit 1, for a play index map).  Now, they look increasingly set to transform the global oil and gas scene as more developments outside NA emerge whether that  activity is in the Vaca Muerta in Argentina, China shale gas, Algerian shale, Saudi Arabian shale gas, etc. 

 Note:  all the production profiles and economics presented below come from our proprietary EVAL program (Economic Valuation Assessment Lens) .  This is the economic analysis program we developed at the Energy Consulting Group (ECG).  It is flexible, accuracte and easy-to-use, and, therefore, invaluable for understanding the economics of the oil and gas industry.  Because of the nature of most of our work, it has been tuned specifically with non-conventional assets in mind.  One of the ways we have done this is to integrate it with the R statistical program.  Some in the industry call or have called shale gas and/or light tight oil plays "statistical" plays.  We don't disagree, which is why we have matched up standard industry approaches for production and economic modeling with the statistical, stochatic models of R.

We have intentionally left off axis labels and certain other information in many of the exhibits presented on this page.  If you are interested in getting the fully annotated versions, please contact us at insight@energy-cg.com, and we will arrange either a conference call or SKYPE consultation.

Web Page Index

Discussion of the Main Economic Drivers of North American shale gas and light, tight oil plays

Samples of Output From the Economic Valuation Asset Lens (EVAL) oil and gas evaluation program


Where are the shale gas and light, tight oil plays under discussion?  The following index map presents many of the more prominent North American plays.

Exhibit 1:  Map of Selected USA and Canadian Light Tight Oil and Shale Gas Plays
Map of Selected USA Light Tight Oil and Shale Gas Plays
Click Image for Full Size
 



Discussion of the Main Economic Drivers of North American shale gas and light, tight oil plays

High Rates, High Declines, and High Costs

To appreciate the full potential of the shale revolution, we have to understand the economics of the plays, and how those economics relate to other plays. To that end the first thing to understand is that the drivers of shale play economics in North America differ significantly from historical onshore NA plays in that they tend to be more prolific, sometimes spectacularly so:

Prolific Initial Rates:  The key attribute that makes the shale plays economically viable are "high" initial rates compared to the previous generation of nonconventional wells, such as those in tight gas plays.  These rates can lead to enough production during the economically critical first four years of production, to make the business case for drilling shale gas and light, tight oil wells, though other factors such as oil and gas prices, well costs, etc. also factor into the economic results.  And, the associated rates of return can be spectacular.  Our extensive work with the shales demonstrates that, depending on the specific circumstances, before tax ROR's can exceed 100%.  Now, not every play, nor every well delivers such performance.  However, it happens with sufficient frequency for the shales to attract investors. So, while the initial decline rates can apporach 70%-80% over the first year of production (discussed next), high starting rates in successful wells can more than compensate. 

Decline profile:  An obvious characteristic, and the one that receives considerable attention from non-industry observers, is the decline profile of a shale well (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 as a well ages.  The high initial decline can transition into lower decline rates over the longer term.  These lower, longer term declines mean that after a handful of years, many shale wells could well turn into long lived, low cost cash cows.

 

Exhibit 2 Generic Horizontal Shale Gas Play Production Profile
Generic Horizontal Shale Gas Play Production Profile
Click Image for Full Size
Exhibit 3:  Generic Vertical Tight Sand gas Play Production Profile
Generic Vertical Tight Sand gas Play Production Profile
Click Image for Full Size
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
 

High Well Costs:  The two primary 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 can add considerable costs to a well, resulting in well costs that are greater than for 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 (high rates, high declines and high costs) are key defining factors when considering well level economics in 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 to defining well level economics.  That said, there are exceptions, especially regarding processing/transportation fees. 

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 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 Curve
Click on the image for higher resolution version of the map.

 

Return to Web Page Index

E&P News and Information

Upstream Online

Rigzone

Energy365

Alexander's
Oil and Gas News

Schlumberger
Oil and Gas News

World Oil

OIl and Gas Journal

Scandinavian
Oil and Gas Magazine

Hart E&P

International and National
Energy Agencies

International Energy Agency
Oil Market Report

Energy Information Agency- US

Department of Trade and
Industry -UK , Oil

Norwegian Petroleum
Directorate-Norway

National Energy
Board-Canada

Pemex

Ministry of Industry and
Energy-Russia

E&P Project Information

Hydrocarbon Technology

Offshore Technology

Samples of Output From the Economic Valuation Asset Lens (EVAL) oil and gas evaluation program

The following are some examples illustrating the flexibility and usefulness of EVAL for quickly evaluating a variety of oil and gas investment opportunities, and doing so with confidence in the results.

   
Notional Well Level Production and Recovery Profiles
Theoritical, But Representative Light, Tight Oil Play
Notional Well Level Production and Recovery Profiles
Click Image for Full Size
Notional Well Level Net Revenue Profile
Theoritical, But Representative Light, Tight Oil Play
Notional Well Level Net Revenue Profile
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Notional Well Level Net Cashflow Profile
Theoritical, But Representative Light, Tight Oil Play
Notional Well Level Net Cashflow Profile
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Improving Economic Robustness and Resiliency of Shale Plays
Improving Economic Robustness and Resiliency of Shale Plays
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Incremental Economics: LTO vs GOM Subsea Tieback
(Note:  Much of the gas produced in the subsea example project is assumed to be reinjected.)
ncremental Economics: LTO vs GOM Subsea Tieback
Click Image for Full Size
 
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