What's new in production

 Vol. 233 No. 7

Shale gas well production rates and estimated ultimate recovery (EUR) are technical issues that geologists have discussed endlessly in recent years. Normally, these would be sorted out over decades in the pages of journals you wouldn’t dream of reading unless you’re an expert in the field. It seems unlikely that the discussion would spill over into mainstream publications like the New York Times but, due to sharply lower gas prices, that’s what is happening.

The issue is not so much future production as future money. The land-lease grab that began around 2006 was a serious attention-getter among investors, and the numbers that were tossed around promised a future of U.S. energy independence, and lots of rich companies and royalty owners.

Land rush. An acquaintance of mine was devoted to a hobby with which I am determinately unfamiliar. It involves leaping from a plane called a Cessna Caravan at 13,000 ft (a true “leap of faith”), falling at 120 mph, then opening a parachute a minute or so later, when you have dropped below 3,000 ft. Great sport, I’m sure, but I wouldn’t do it for love or money.

Apparently, pulling your ripchord whilst below 2,000 ft or so is frowned upon. Waiting until you’re below 1,000 ft--called an “extreme low-pull”--might get you fined or banished. One problem, said a participant, is that at low altitudes you get a phenomenon called “ground rush,” where you can see the ground slowly expanding as you fall, like sitting on the front row of an iMax theater. This, he said, can be “mesmerizing” and you might neglect to pull, “which can be really bad.” No fooling?

Seeing wads of money below can have a similar effect, and that might explain investors’ initial excitement over the potential of U.S. shale gas plays. Just a few years ago, companies were willing to pay top dollar for gas leases in the Barnett, Haynesville and Marcellus. It was reported that around Fort Worth, in the heart of the Barnett, companies paid as much as $27,500 per acre for a lease.

Production kept climbing, but prices stayed acceptable, if not great. All U.S. gas needs were met domestically, and it was said that the country would begin exporting LNG by 2016, starting with an equivalent of 1.1 Bcfd and doubling within three years.

Freefall. In the summer of 2008, the worldwide economic crash kicked the props out from under natural gas prices, which fell over 60% by year-end, and with some bumps and dips, have trended down ever since. Yet production has continued to climb, even with a higher percentage of drillers switching to liquids, and the talk about “100 years of gas” has continued. Woodford shale gas production has declined, but other shale areas are still producing prolifically. The Haynesville shale, which surpassed the Barnett last year in daily output, is producing about 7 Bcfd. The Marcellus production is about one-third of that, but is still rising sharply.

Much has been written about the so-called “manufacturing model” of shale gas (see this column, May 2012). This model assumes that costs of a shale gas well are predictable and low, and that risks are lower because drilling technology has improved both their success rate and their production life. Since shale gas wells that are currently producing have not been through their whole life-cycles yet, decline rates, and hence EURs, are estimated using empirical formulas.

A shale gas well typically has a very high initial production rate, which starts falling as soon as the well comes onstream, and heads towards zero. The cumulative gas that a well produces over its lifetime is the ultimate recovery. How much gas is economically recoverable depends on the price and the rate of decline. Even the most optimistic investors acknowledge that shale gas wells decline rapidly. At some point they cease being economical, presumably some time before the cost of compression exceeds the price fetched.

Jason Baihly, et al., (SPE paper 135555) discussed a highly detailed study of some 1,885 wells drilled between 2008 and 2010 in the core productive areas of the Barnett, Fayetteville, Woodford and Haynesville shales. There were, as you might expect, large differences from region to region, but overall, the data shows that rates of production are improving as the industry gains experience and laterals get longer, and the number of stages pumped increases. Also, better log and core evaluation has led to better well placement.

Whether or not a particular well is a financial success depends on many factors, one of the most important being capital cost of leasing land. As Baihly puts it, “Early entrants have a decided advantage, some paying one-tenth the lease price of latecomers.”

Examination of the four large shale plays discussed (the Eagle Ford had too little data to be useful) allowed the authors to compare the breakeven price for gas wells in different basins (factoring in both operating and royalty costs). The Fayetteville had the best showing, with a low operating cost and a breakeven price of between $3.72 and $3.20/Mcf. The Barnett was a little higher at about $3.72/Mcf. The Haynesville, on the other hand, gave a breakeven of $6.95 in 2008, falling to $6.95/Mcf in 2009, reflecting improved EUR. The Woodford had the highest breakeven at over $7/Mcf. Such prices have not been seen in these parts for awhile.

Ground rush. There has been understandable nervousness among some investors. It’s brought on by the realization that a given shale gas play may require much higher prices to make them commercial long-term. Those giddy souls who got to the party late, and paid way too much, are afraid that field of riches down below might turn out to be just a field.

There is certainly a lot more to say about this. As for skydiving, I take it back. I would do it for money. You just can’t afford it.