A Statistical Approach For The Effective Economic Modeling And Portfolio Selection Of Unconventional Resource Opportunities

Abstract

Abstract Many firms are pursuing unconventional resource opportunities across the globe as a low risk vehicle for growth. Unfortunately, not all resource plays have met the expectations of this low risk model. Some opportunities are very product price dependent and others are both price and technology dependent. This paper provides an overview of the North American industry's use of statistically based production and EUR type curves to assess new opportunities and ongoing developments. This paper highlights an alternative methodology for the selection of future unconventional resource opportunities based on their corporate definition of materiality and the use of analog production type curves. This methodology focuses on appropriate production type curves rather than reservoir models for tight gas sands and shale gas opportunities. Examples of production type curves will be presented to demonstrate the need to align these curves to the geological facies, the well type (vertical versus horizontal), and the completion technology (fracture stimulation size, fracture fluids, and the number of fracture stages). The appropriate selection from the myriad of unconventional resource opportunities available is often a critical component to achieving corporate goals. Pick the wrong opportunity and even with superb execution, the returns are limited. Selecting the right unconventional resource opportunity enhances your probability to please shareholders. The methodology is similar, yet unique from traditional basin analysis in its use of Common Risk Segment (aka 'traffic light') maps and production type curves versus a range of reserves in a prospect. Introduction Unconventional gas resources are playing an ever increasing role in gas supply in countries that are seeking secure domestic supplies; especially when they are cost competitive with domestic and imported supplies. In North America, the unprecedented increase in gas prices from 1999 to 2008 drove the development of technologies to unlock these resource plays. Resource play developments are technology intensive and sensitive to gas price. The combination of historically high prices and major technology advances in horizontal wells, and massive multi-staged fracturing in vertical and horizontal wells, has fueled this unprecedented growth. Today over 40% of the United States (Kuuskra, 2007) onshore natural gas production is from unconventional natural gas sources. Most projections of the future growth in onshore natural gas production in North America, absent a "Black Swan" event, will continue to be unconventional natural gas. Like the world of fashion, the old has once again become new in North America. Our first commercial sources of natural gas were unconventional. The Energy Information Administration of the USA's Department of Energy, documents that William Hart dug the first successful well that was intended to produce natural gas in 1821, at Fredonia, New York. He dug a twenty one foot deep hole (a shale gas well) to try and bring a larger flow of gas to the surface. Expanding on Hart's work, the Fredonia Gas Light Company was eventually formed, becoming the first American natural gas company. Currently the fastest growing natural gas firms in terms of North American production, without exception, are all focused on growth through unconventional gas development (Chesapeake Energy, 2009).