What's new in exploration

	Vol. 228 No. 10
ARTHUR BERMAN, CONTRIBUTING EDITOR, bermanae@gmail.com

Reader feedback on the Fayetteville Shale. I expected strong reader response to my August column, “The Fayetteville Shale: An early evaluation,” and I got it. Most reactions were positive, but the negative comments are more interesting and revealing. Critics make some well-reasoned points and legitimate criticism of my analysis. Their comments also illustrate how the industry is divided in its opinion about the Fayetteville and Barnett Shale plays.

Several important points emerged:

• Recently completed Fayetteville Shale wells that used slick-water fracture stimulation should be profitable. Apparently, most of the horizontal wells that I evaluated were completed using less effective stimulation techniques.
• The application of hyperbolic decline models to preliminary Fayetteville Shale production results in higher economic reserves and longer-lived production than I used in my analysis.
• Economic models used by some Fayetteville operators incorporate lower lease operating costs than I presented, and some companies do not charge certain overhead costs against production sales as I did.

A very positive meeting resulted from an email interchange with one critic. He accepted my offer to show him and his staff how I had done my analysis. After seeing my evaluation, they showed me their proprietary daily production reports on several recent Fayetteville wells that were completed using slick-water fracture stimulation. These wells are producing 2-3 MMcfgd, with low decline rates for the first several months of production. If production continues to decline at current rates, these wells will produce 1-2.5 Bcfg in the first few years, and will be profitable according to the economic model presented in my article.

I asked why it had taken Fayetteville operators several hundred wells before learning what was, apparently, already known in the Barnett Shale play: Slick-water fracs make the difference between marginal and profitable wells. They could not answer my question since they had not operated wells until recently.

The information that I was shown at this meeting changed my perspective on future profitability in the Fayetteville play. I am now optimistic that future completions using slick-water fracture stimulation may be commercially successful at wellhead prices used in my August column. It does not change the fact that a tremendous amount of capital has been used up by earlier, less effective stimulation methods; nor does it change the fundamental conclusion that most Fayetteville wells that have been drilled to date will probably be marginally commercial at current gas prices.

Several readers objected to my use of exponential decline for projecting economic reserve potential from limited production history data. Should well declines be projected hyperbolically or exponentially?

Some readers felt that the Fayetteville Shale should be declined hyperbolically because it is an unconventional reservoir like the Barnett Shale. In the Barnett, most wells show hyperbolic decline patterns, though their hyperbolic decline rate is fairly steep.

In the Fayetteville, most wells have not yet demonstrated this pattern of decline because their production histories are too short. To assume that wells should exhibit hyperbolic decline, without actually observing this behavior, is inductive and, therefore, unscientific. Some readers disagreed with how costs were calculated and charged against a well’s production sales. They felt that the lease operating expenses (LOE) and general and administrative (G&A) costs that I used in my analysis were too high. I used a combined LOE and G&A cost of $1.21/Mcf in my Fayetteville model because that cost was cited by Southwestern Energy Co., the leading operator in the Fayetteville Shale, in their Second Quarter 2007 Results document. A consortium of leading gas producers, many of which are active in the Fayetteville and Barnett shale plays, have published their production costs. The consortium includes Anadarko, EOG, Chesapeake, Devon, XTO, Noble, Newfield, Plains and Apache. Their average LOE and G&A costs are consistent with the costs that I used for the Fayetteville evaluation. While some companies may have lower costs than others, I am suspicious of claims that true costs should deviate far from what the leading operators have publicly reported.

There were a few readers who objected to using a four-year average well life in the economic model that I presented. One reader even suggested that I should have used 30-year well lives for the Fayetteville Shale. The longest production history in the Fayetteville play is 25 months and the average well has been producing for under seven months. I, therefore, investigated longer well histories from the Barnett Shale where 320 horizontal wells have been producing gas for at least two years (the longest production history is 68 months). The three longest-lived of these are currently producing at rates that are below lease operating costs. While it is impossible to predict how Fayetteville wells will perform in the long term, I doubt that a reserve certification group would go beyond what the current data and reasonable production analogies support.

It is important to remember that this column limited to about 1,000 words. It is not intended as a comprehensive analysis. The column reflects my judgment as an experienced petroleum professional based on a level of research appropriate to the scope of the column.

I have learned a lot from interaction with readers about the Fayetteville Shale. I believe that certain key issues have been clarified or at least defined that apply more generally to other resource plays. Interpreters and companies project decline curves differently, and use widely varying costs and economic assumptions. Some apparently rely heavily on analogies from the Barnett Shale play to predict future Fayetteville production.

It is very early in the history of the Fayetteville play, and no one really knows the final outcome; there is not enough information to predict. Early production from a few wells indicates a positive result from slick-water fractures. It is not known if these wells will continue to produce at high rates.

In this column, I wanted to show that a range of opinion exists about resource plays such as the Fayetteville Shale. It’s too early for a right or wrong opinion about the commercial potential of the Fayetteville Shale or other resource plays.Beyond opinion, however, evaluation methods and techniques must be based on what is known, and not on what is hoped for based on an imperfect understanding of unconventional reservoirs and their variability.