U.S. Shale Gas: Less Abundance, Higher Cost
Posted by aeberman on August 5, 2011 - 10:15am
Topic: Geology/Exploration
Tags: demand, economics, shale gas, supply [list all tags]
Arthur E. Berman and Lynn F. Pittinger
Lynn Pittinger is a consultant in petroleum engineering with 30 years of industry experience. He managed economic and engineering evaluations for Unocal and Occidental Oil & Gas, and has been an independent consultant since 2008. He has collaborated with Berman on all shale play evaluation projects since 2009.
Introduction
Shale gas has become an important and permanent feature of U.S. energy supply. Daily production has increased from less than 1 billion cubic feet of gas per day (bcfd) in 2003, when the first modern horizontal drilling and fracture stimulation was used, to almost 20 bcfd by mid-2011.
There are, however, two major concerns at the center of the shale gas revolution:
• Despite impressive production growth, it is not yet clear that these plays are commercial at current prices because of the high capital costs of land and drilling and completion.
• Reserves and economics depend on estimated ultimate recoveries based on hyperbolic, or increasingly flattening, decline profiles that predict decades of commercial production. With only a few years of production history in most of these plays, this model has not been shown to be correct, and may be overly optimistic.
These are not purely technical topics for debate among petroleum professionals. The marketing of the shale gas phenomenon has been so effective that important policy and strategic decisions are being made based on as yet unproven assumptions about the abundance and low cost of these plays. The “Pickens Plan” seeks to get congressional approval for natural gas subsidies that might eventually lead to conversion of large parts of our vehicle fleet to run on natural gas. This might commit the U.S. to decades of natural gas exports at fixed prices in the face of scarcity and increasing prices in the domestic market. Similarly, companies have gotten permits from the government to transform liquefied natural gas import terminals into export facilities that would commit the U.S. to decades of large, fixed export volumes. If reserves are less and cost is more than many assume, these could be disastrous decisions.
Executive Summary
Our analysis indicates that industry reserves are over-stated by at least 100 percent based on detailed review of both individual well and group decline profiles for the Barnett, Fayetteville and Haynesville shale plays. The contraction of extensive geographic play regions into relatively small core areas greatly reduces the commercially recoverable reserves of the plays that we have studied.
The Barnett and Fayetteville shale plays have the most complete history of production and thus provide the best available analogues for shale gas plays with less complete histories. We recognize that all shale plays are different but, until more production history is available, the best assumption is that newer plays will develop along similar lines to these older plays. There is now far too much data in Barnett and Fayetteville to continue use of strong hyperbolic flattening decline models with b coefficients greater than 1.0.
Type curves that are commonly used to support strong hyperbolic flattening are misleading because they incorporate survivorship bias and rate increases from re-stimulations that require additional capital investment. Comparison of individual and group decline-curve analysis indicates that group or type-curve methods substantially over-estimate recoverable reserves.
Results to date in the Haynesville Shale play are disappointing, and will substantially underperform industry claims. In fact, it is difficult to understand how companies justify 125 rigs drilling in a play that has not yet demonstrated commercial viability at present reserve projections until gas prices exceed $8.68 per mmBu.
CONTENTS
Production Volume and Reserve Growth vs. Profitability
Entry of Major Oil Companies Into Shale Plays
Evaluation of Shale Gas Well Performance
Well Performance Evaluation Methodology
Barnett Well Performance
Fayetteville Well Performance
Haynesville Well Performance
Comparison to Operator Claims
Matching Aggregate Production Profiles for Shale Gas Plays
Economics
Summary and Conclusions
Appendix
Production Volume and Reserve Growth vs. Profitability
Analysts, government agencies, academics and media pundits commonly equate large shale gas resource levels, production and reserve growth with commercial success. We do not dispute the impressive growth of shale gas resources, reserves or production. Examination of the balance sheets of the leading companies involved in shale gas development, however, reveals limited earnings or profit. We must ask the proponents of shale gas success to explain this fundamental discrepancy.
Some argue that price explains poor business results. First of all, whose fault is it that gas was over-produced to the point that prices were depressed other than the same companies that analysts praise for the shale gas revolution? Secondly, realized prices (the prices that results from hedging production volumes in advance of sales) over the past 5 or so years have never been higher because of high spot prices through mid-2008 and favorable hedge positions for much of the following period. This means that low prices cannot be blamed for lack of business success. The simple truth is that shale gas ventures are costly and profits are marginal at best.
Three decades of natural gas extraction from tight sandstone and coal-bed methane show that profits are marginal in low permeability reservoirs. Shale reservoirs have orders of magnitude lower reservoir permeability than tight sandstone and coal-bed methane. So why do smart analysts blindly accept that commercial results in shale plays should be different? The simple answer is found in high initial production rates. Unfortunately, these high initial rates are made up for by shorter lifespan wells and additional costs associated with well re-stimulation. Those who expect the long-term unit cost of shale gas to be less than that of other unconventional gas resources will be disappointed.
Entry of Major Oil Companies Into Shale Plays
Another common theme among shale advocates is that the entry of major oil companies into some of these plays proves that they are commercially viable. There are as many reasons for big companies to enter shale gas plays as there are big companies but the most obvious reason is reserves.
Reserve replacement has been a challenge for major oil companies for at least the last decade as opportunities in the international arena have contracted. North American shale gas plays offer a temporary solution. Whether big companies can find operational and technological ways to make these plays commercial is another question but, for the short term, shale plays provide a means to add reserves.
The notion that investment by large companies proves commercial success is disproved by recent history. We have to look no further than corn ethanol and other biofuel companies where optimistic claims of profitability are now seen to be unfounded. This is even with government mandated use, major subsidies, and import tariffs to protect domestic producers from competition. An excellent discussion of the details of this situation by Robert Rapier can be found at this link:
http://robertrapier.wordpress.com/category/pacific-ethanol/
Evaluation of Shale Gas Well Performance
Our analysis of shale gas well decline trends indicates that the estimated ultimate recovery (EUR) per well is approximately one-half of the values commonly presented by operators. The average EUR per well for the most active operators is 1.3 Bcf in the Barnett, 1.1 Bcf in the Fayetteville, and 3.0 Bcf in the Haynesville shale gas plays.
The primary difference between our analysis and the typical well profile proposed by operators is that we observe predominantly exponential (weak to moderate hyperbolic) decline in most of the individual well decline trends, rather than steadily flattening hyperbolic decline. For the Barnett and Fayetteville shale plays, we identify a two-stage exponential decline based on decline curve analysis (DCA) of individual wells; for the Haynesville Shale we observe predominantly exponential decline for individual wells.
Two-stage exponential decline is characterized by an initial ten- to fifteen-month period of steep decline followed by a stable, shallower rate of decline that continues up to the present life of wells (commonly for four or more years to date in the Barnett Shale). Our emphasis is on matching the relatively stable, shallower stage (Exhibit 1) because that is the portion of the decline history that best predicts future performance.
see complete article here....http://www.theoildrum.com/node/8212
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