Option Values of Alternative Completion and Production

Strategies in Shale Gas Plays

Janie M Chermak, University of New MexicoJames Crafton, Performance Science Inc.,

Robert Patrick Rutgers University

30th USAEE/IAEE North American ConferenceWashington, DC

October 12, 2011

Shale Gas Plays

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“These wells are depleting so quickly thatthe operators are in an expensive gameof catch-up”

Aubrey McClendon, 11/2009

Shale Gas Plays

• PRODUCTION- 2008: 2.02 trillion cubic feet (Tcf)- 2009: 3.11 Tcf

• RESERVES- 860 Tcf, with 410 Tcf from Marcellus

(EIA AEO 2011)

- 84 Tcf from Marcellus(USGS Aug 2011)

Shale Gas Plays

Impact of shale gas on the natural gas industry depends on:

- actual production meeting forecasts

- ultimate recovery

Research

• Actual production- reservoir characteristics- well characteristics- capital choices (completion and re-completion)- production choices

• Ultimate recovery may depend on- all of the above and- early management production decisions

Model• Develop a theoretical dynamic optimization model

that allows for periodic capital investment overthe life of the well.

• Based on the necessary conditions we developan econometrically estimable cumulative production function:

X is a vector or reservoir characteristics and Z is a vector of completion and production choices. Included in Z are characteristics of the completion job, including the fracture half-length, Fi.

Model

The fracture sub-production function is also a functionof reservoir characteristics and completion choices:

Model

We estimate this simultaneous system of equations using3SLS and a log-log specification.

Data

• 120 shale gas wells located in the US- 39 horizontal wells- 81 vertical wells

• all wells began production since 2007

• have between 30 and 720 days of production data

• production data

• reservoir characteristics

• completion and production choices

• Well Characteristics- permeability thickness- Initial Reservoir Pressure- Perforated Interval

• Completion Choices- Gallons of fracture fluid- Pound of proppant- Barrels per minute- PSIG- Stages- Micro-emulsion concentration- 100 Mesh- 2040 Equivalent Mesh- Winter Fracture- Time between completion start and first production

• Completion Outcome- Fracture Half-length: final and early- Fracture Conductivity

• Cumulative Production- 10, 30, 60, 90, 1870, 360, 720 days- Ratio: Production Days to Calendar Days

Results

• The fracture resulting from the completion job is significant and positive for early period production

• Fracture conductivity significant and positive for vertical wells

• Micro-emulsion concentration has a positive and significant impact

• The completion job is significant. For horizontal wells it is how the job is performed (rate and pressure); for vertical wells it is the volumes and how the job is performed.

Results

• Stages are significant and positive for horizontal wells, but not for vertical wells

• Delay between beginning completion and production significant and negative

• Ratio is significant and negative

• Winter completion job negatively impacts vertical well production

• Decline (all else equal) different. Early period decline 7% larger for horizontal wells

Conclusions

• Shale Gas Plays impacting the US natural gas industry

• May not be as well understood as we first believed

• Initial choices may impact well potential

• Initial choices may impact ultimate recoverable gas

• Preliminary results suggest vertical and horizontal well productivity are impacted by reservoir characteristics, completion and production choices, but not necessarily in the same manner.