Shale Plays A Time for Critical Thinking - The Seventh Fold
Shale Plays
A Time for Critical Thinking
Arthur E. Berman ASPO October 2009
Acknowledgments
• IHS • World Oil • Lynn Pittinger
Premise of the Presentation • The mainstream belief is that shale plays have ensured the U.S. an abundant supply of inexpensive natural gas that can be produced at a profit • Marginal cost of gas production in shale plays is ~$7‐8/Mcf, and considerably more for many companies despite public statements by operators & analysts •Little is known about most of the active shale plays upon which this belief is based—assumptions about decline rates are the sole support for large reserves •There is sufficient production history in the Barnett Shale to prove that: ¾Reserve predictions based on hyperbolic decline are too optimistic compared with production performance ¾ Type curves published by operators and investment analysts violate petroleum engineering concepts and methods of decline‐curve analysis ¾ Average well life is shorter than predicted & decline rates are higher ¾ Volume of commercially recoverable resource has probably been greatly over‐estimated • The Fayetteville Shale play has sufficient production history to corroborate Barnett conclusions Early evaluation of Haynesville suggests a similar pattern A more cautious approach to new shale plays make sense, but probably will not occur Shale plays require critical thinking, especially in a low gas‐price environment
Much of the current over‐supply came from over‐production of shale gas plays • Potential Gas Committee report June 2009 • Abundant natural gas resource of 1,836 TCF • Most of 39% increase (542 Tcf) since last report due to shale gas • In addition to 41 Tcf of marketed gas in last 2 years since previous report
• Shale players are now confident that they are in the right business • The Twin Miracles of Shale 9 Low risk & high reward 9 High capital costs + low natural gas prices = profit
Yet the balance sheets of many of these companies tell a different story
•High debt load • Ongoing asset sales • Asset write‐downs • Low cash reserves • Reserves trump profit
Shale plays are the great hope for abundant natural gas supply in the U.S.
Barnett Shale EUR Evaluation
• This is the model for other shale plays • First shale gas play commercially developed • About 12,000 wells • Approximately 8,000 horizontal wells & 4,000 vertical wells • Most wells drilled horizontally with fracture stimulations since 2002 • 70% of allU.S. shale gas today •Cumulative gas production is 5.64 Tcf • Operators claim 2.5‐3.5 Bcf/well average EUR
Conclusions from decline‐curve analysis of ~2,000 Barnett Shale wells
• • • •
• • • •
Average EUR = 0.95 Bcf/well $7.00/Mcf gas price requires 1.5 Bcf to break even ~30% of Barnett wells will reach this threshold Enough production history to know the answer: wells are at almost 70% of EUR (~ 5 years of production) The problem: overly optimistic decline rates based on hyperbolic decline model and long well life True decline rate >25% Well life ~8 yrs Time to abandonment 4.5 yrs from now
Barnett Shale
• Resource base estimated at 26 Tcf • Only about 10 Tcf will be realized • 70% of that is non‐commercial • Cost of wells and leasing to date: $35 billion • This does not include operating cost, production taxes, G&A, interest expenses, gathering & transportation, etc. • Cost to realize 26 Tcf ~$80 billion/ 25,000 additional wells
Overly optimistic decline models: 2007 projection
1.15 Bcf EUR
Overly optimistic decline models: 2009 projection
0.44 Bcf EUR
True decline rates for horizontal Barnett Shale wells Barnett Shale Horizontal Well Production & Decline Rate Normalized for Workovers 350,000 65%
Annual decline rate
Annual Gas Production (Mcf/Year)
300,000
250,000
200,000
150,000
57%
34%
100,000
18% 21% 50,000
19% 27%
24%
• Normalized observed decline rates by removing production increases following re‐ fracs&workovers •This suggests a terminal decline of about 20% • 95% of wells can be declined exponentially— average 47% decline
0 Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year of Production
Barnett Shale Horizontal Well Decline Rates Normalized for Workovers Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 65% 57% 34% 18% 21% 19% 27% 24%
What Do the Operators Claim?
• CHK = 2.65 Bcf/well • DVN = 2.2 Bcf/well • XTO = 3.3 Bcf/well
Mainly through very low decline rates below 15%/yr (hyperbolic decline trends b > 1.0)
Compared to: This Study = 0.95 Bcf/well Company Chesapeake Devon XTO EOG Encana
Number of Wells in Sample 227 56 302 345 191
EUR (MMscf) 923 1,100 1,123 1,025 959
Why are our EUR estimates lower than those of many operators?
Low terminal decline rate & a hyperbolic exponent b that exceeds all individual well decline rates: also exceeds theoretical maximum for hyperbolic decline
56 years of well life
How Important Is Assumed Well Life? Barnett Type Well ‐ Incremental Net Present Value Added By Time Periods of Production ‐ 10% Discount Rate 100%
1.1% 10.7%
% Of Value Added By Each Time Period
90% 80%
0.0%
2.8%
16.2%
• • • • • •
70% 60% 50% 40% 69.2% 30% 20%
•
10%
Used the CHK Type Well for the Barnett Play IP 2 MMscfd D = 2.974/yr, b = 1.61 70% of Value produced in 1st 5 yrs 85% in 1st 10 yrs Negligible value added after 20 yrs ( $7‐ 9/Mcf • Not commercial at current natural gas prices • Methods used to support reserves and profitability in new plays cannot be corroborated in plays with history • Full‐cycle economics show that most value added in first few years due to steep decline rates • Production beyond 10‐20 years has no value depending on decline rates • Low risk & high reward model challenges common sense • High cost‐low price profitability defies logic •This will continue as long as interest payments are made and debt can be deferred or sold •The manufacturing paradigm must be discarded: complex reservoirs require careful science • Shale plays require critical thinking, especially in a low gas‐price environment
Acknowledgments
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” John Adams “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” Sherlock Holmes (Conan‐Doyle)
Shale Plays
A Time for Critical Thinking
Arthur E. Berman ASPO October 2009
A Time for Critical Thinking
Arthur E. Berman ASPO October 2009
Acknowledgments
• IHS • World Oil • Lynn Pittinger
Premise of the Presentation • The mainstream belief is that shale plays have ensured the U.S. an abundant supply of inexpensive natural gas that can be produced at a profit • Marginal cost of gas production in shale plays is ~$7‐8/Mcf, and considerably more for many companies despite public statements by operators & analysts •Little is known about most of the active shale plays upon which this belief is based—assumptions about decline rates are the sole support for large reserves •There is sufficient production history in the Barnett Shale to prove that: ¾Reserve predictions based on hyperbolic decline are too optimistic compared with production performance ¾ Type curves published by operators and investment analysts violate petroleum engineering concepts and methods of decline‐curve analysis ¾ Average well life is shorter than predicted & decline rates are higher ¾ Volume of commercially recoverable resource has probably been greatly over‐estimated • The Fayetteville Shale play has sufficient production history to corroborate Barnett conclusions Early evaluation of Haynesville suggests a similar pattern A more cautious approach to new shale plays make sense, but probably will not occur Shale plays require critical thinking, especially in a low gas‐price environment
Much of the current over‐supply came from over‐production of shale gas plays • Potential Gas Committee report June 2009 • Abundant natural gas resource of 1,836 TCF • Most of 39% increase (542 Tcf) since last report due to shale gas • In addition to 41 Tcf of marketed gas in last 2 years since previous report
• Shale players are now confident that they are in the right business • The Twin Miracles of Shale 9 Low risk & high reward 9 High capital costs + low natural gas prices = profit
Yet the balance sheets of many of these companies tell a different story
•High debt load • Ongoing asset sales • Asset write‐downs • Low cash reserves • Reserves trump profit
Shale plays are the great hope for abundant natural gas supply in the U.S.
Barnett Shale EUR Evaluation
• This is the model for other shale plays • First shale gas play commercially developed • About 12,000 wells • Approximately 8,000 horizontal wells & 4,000 vertical wells • Most wells drilled horizontally with fracture stimulations since 2002 • 70% of allU.S. shale gas today •Cumulative gas production is 5.64 Tcf • Operators claim 2.5‐3.5 Bcf/well average EUR
Conclusions from decline‐curve analysis of ~2,000 Barnett Shale wells
• • • •
• • • •
Average EUR = 0.95 Bcf/well $7.00/Mcf gas price requires 1.5 Bcf to break even ~30% of Barnett wells will reach this threshold Enough production history to know the answer: wells are at almost 70% of EUR (~ 5 years of production) The problem: overly optimistic decline rates based on hyperbolic decline model and long well life True decline rate >25% Well life ~8 yrs Time to abandonment 4.5 yrs from now
Barnett Shale
• Resource base estimated at 26 Tcf • Only about 10 Tcf will be realized • 70% of that is non‐commercial • Cost of wells and leasing to date: $35 billion • This does not include operating cost, production taxes, G&A, interest expenses, gathering & transportation, etc. • Cost to realize 26 Tcf ~$80 billion/ 25,000 additional wells
Overly optimistic decline models: 2007 projection
1.15 Bcf EUR
Overly optimistic decline models: 2009 projection
0.44 Bcf EUR
True decline rates for horizontal Barnett Shale wells Barnett Shale Horizontal Well Production & Decline Rate Normalized for Workovers 350,000 65%
Annual decline rate
Annual Gas Production (Mcf/Year)
300,000
250,000
200,000
150,000
57%
34%
100,000
18% 21% 50,000
19% 27%
24%
• Normalized observed decline rates by removing production increases following re‐ fracs&workovers •This suggests a terminal decline of about 20% • 95% of wells can be declined exponentially— average 47% decline
0 Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year of Production
Barnett Shale Horizontal Well Decline Rates Normalized for Workovers Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 65% 57% 34% 18% 21% 19% 27% 24%
What Do the Operators Claim?
• CHK = 2.65 Bcf/well • DVN = 2.2 Bcf/well • XTO = 3.3 Bcf/well
Mainly through very low decline rates below 15%/yr (hyperbolic decline trends b > 1.0)
Compared to: This Study = 0.95 Bcf/well Company Chesapeake Devon XTO EOG Encana
Number of Wells in Sample 227 56 302 345 191
EUR (MMscf) 923 1,100 1,123 1,025 959
Why are our EUR estimates lower than those of many operators?
Low terminal decline rate & a hyperbolic exponent b that exceeds all individual well decline rates: also exceeds theoretical maximum for hyperbolic decline
56 years of well life
How Important Is Assumed Well Life? Barnett Type Well ‐ Incremental Net Present Value Added By Time Periods of Production ‐ 10% Discount Rate 100%
1.1% 10.7%
% Of Value Added By Each Time Period
90% 80%
0.0%
2.8%
16.2%
• • • • • •
70% 60% 50% 40% 69.2% 30% 20%
•
10%
Used the CHK Type Well for the Barnett Play IP 2 MMscfd D = 2.974/yr, b = 1.61 70% of Value produced in 1st 5 yrs 85% in 1st 10 yrs Negligible value added after 20 yrs ( $7‐ 9/Mcf • Not commercial at current natural gas prices • Methods used to support reserves and profitability in new plays cannot be corroborated in plays with history • Full‐cycle economics show that most value added in first few years due to steep decline rates • Production beyond 10‐20 years has no value depending on decline rates • Low risk & high reward model challenges common sense • High cost‐low price profitability defies logic •This will continue as long as interest payments are made and debt can be deferred or sold •The manufacturing paradigm must be discarded: complex reservoirs require careful science • Shale plays require critical thinking, especially in a low gas‐price environment
Acknowledgments
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” John Adams “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” Sherlock Holmes (Conan‐Doyle)
Shale Plays
A Time for Critical Thinking
Arthur E. Berman ASPO October 2009
