challenges in the evaluation of unconventional reserves ... · cesar guzzetti gaffney, cline &...
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Thoughts from US Shale Experience
Cesar Guzzetti Gaffney, Cline & Associates
Challenges in the evaluation of unconventional
reserves – shale gas and tight oil
I was on Vacation !!!!!!!!
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Last week, in Lagoa Azul,
Angra dos Reis.
Outline
• Fundamentals
• Unconventional Resources - Shale
• Key economic drivers to call unconventional resources,
“Reserves”
• Call for caution
• Conclusions
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Fundamentals
• Reserves are estimated (not calculated or measured)
• Reserves are predicted future production (sales) volumes
• Reserves estimates depend on
– The data available
– The field development plans
– Oil and Gas prices
– Professional expertise and judgment (multi-disciplinary)
• Reserves are sub-set of “Resources”, the generic term for
all petroleum volumes
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Reserves/Resources Reporting Systems
• Petroleum Resources Management System (SPE PRMS,
2007)
– Supplemental by Application Guidance (2011)
– Endorsed by SPE/WPC/AAPG/SPEE/SEG
– Becoming de facto standard but no regulatory authority
• SEC rules (US)
– Proved Reserves definitions (1978)
– Revised regulations (2009)
• Other stock exchange/government systems
– TSX, Russia, Norway, China, India, Nigeria…
Application to unconventional resources driven by
North American practice 5 © 2013 Gaffney Cline & Associates. All Rights Reserved
Commerciality
• Firm intention to proceed…
• …in a reasonable time frame
• Development project meeting economic criteria
• Market
• Facilities (export route, access to technology)
• Permissions (legal, contractual, environmental)
Commerciality requires reasonable expectation
that all of the above will be forthcoming
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Reservoir (volumes, productivity)
SPE-PRMS Definitions and Comments
• Unconventional resources… are pervasive throughout a
large area and …are not significantly affected by
hydrodynamic influences
• “… typically a need for increased sampling density to
define… in-place volumes and variations in reservoir
quality…”
• “successful pilots or operating projects in the subject
reservoir or successful projects in analogous reservoirs
may be required to establish a distribution of recovery
efficiencies…”
• “require specialized extraction technology, and…
significant processing prior to sale”.
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Discovery and Commerciality
• Same definitional principles and guidelines apply
as for conventional reservoirs
• Discovery is less an issue that commerciality
– Existence of the “reservoir” may not be in doubt
– Demonstrating commercial production rates is the key
issue
• Pilot projects are generally needed unless good
analogue is available
– Horizontal multi-fracked wells in shale
– Dewatering in CBM
– Need for infrastructure to avoid flaring
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Types of Unconventional Resources
• Extra-Heavy Oil/Bitumen
• Tight Gas Formations
• Coalbed Methane
• Shale Gas
• Oil Shale
• Gas Hydrates
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Shale Gas Characteristics
• Shale gas is produced from organic-rich mudrocks, which serve as a
source, trap, and reservoir for the gas
• Shales have very low matrix permeability (micro- to nano-Darcy),
requiring either natural fractures and/or hydraulic-fracture stimulation
to produce the gas at economic rates
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EIA
Fractured Horizontal Well Schematic
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Source: ESG Solutions
And this is What it Really Looks Like … 52,000 HP in the Woodford Shale
13 © 2012 Gaffney, Cline & Associates. All Rights Reserved.
$0.0
0
$1.3
2
$1.4
0 $
2.2
3
$2.8
6
$2.8
9
$3.1
5
$3.1
7
$3.3
0
$3.4
5
$3.6
6
$3.7
5
$3.7
7
$3.8
8
$4.0
3
$4.3
7
$4.6
9
$4.9
3
$5.4
9
$5.7
3
$6.1
9
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$/M
MB
tu
NYMEX BEP @ 10% After Tax ROR
Breakeven gas price for major U.S. shale gas plays
14 © 2013 Gaffney Cline & Associates. All Rights Reserved Source: Credit Suisse Dec 2012
How Do We Establish Commerciality?
Key Value Drivers
Technical (Subsurface)
Resource Assessment & Quantification
Understanding the missing information: Lack of Analogues & Historic Data
Decline Rates Across Wells
Initial Production Rates/Type Curves
Total No of Wells Required
EUR Per Well
Liquid Gas Ratio
Commercial
Understanding Costs
Pipeline, Infrastructure, Facilities, Water supply & handling
External Barriers
Applicable Fiscal regime
Project Break-even
(Price, Well count, IP rate)
Time to Market
Single Well vs. Pad Economics
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Key Elements for the sustainable development
of hydrocarbon resources
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Hypothetical Development under a 25-year -
Schematic
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0
200
400
600
800
1,000
0
50
100
150
200
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
US
$ M
M
Ga
s P
rod
ucti
on
Bcf
Contract Year
Conventional Production and Costs Opex MM$ 2,061
Capex MM$ 3,092
Production Bcf 2,061
0
200
400
600
800
1,000
0
50
100
150
200
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
US
$ M
M
Ga
s P
rod
ucti
on
Bcf
Contract Year
Unconventional Production and Costs Opex MM$ 1,031
Capex MM$ 9,276
Production Bcf 2,061
Much slower production build up and
extended capex spend
Checks
• EUR estimates with time
– SEC requirement for “reasonably certain EUR to increase or
remain constant”
– Any analysis that fails this test does not comply
• Use of Dmin?
– Any value accepted by SEC?
• 5% for shales?
• 7-8% for tight gas?
• Ultimately 2-3% may apply??
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The Unconventional Challenges
• How to predict performance for unconventional reservoirs,
especially shale gas wells
• How and when to assign reserves
Type Well
Most critical assumption is often over-simplified
Not all shale formations are the
same!
• Does not involve natural constraints
• Difficult to explain well design effects
• Optimization is based on “trial and error”
• Large investments for “know-how”
• Geo-mechanical effects are ignored
• Long term predictions are questionable
Assimilation of historical data and building of
“type curves” has drawbacks:
The Problem
• Shale reservoir performance prediction is more complex than more traditional formations
• Conventional theory does not work
• Limited history can lead to forecasting errors
• Type curves are widely used and, potentially, abused
• The choice of which type curve to use depends on a number of factors including area, permeability-thickness, lateral length, and completion effectiveness
• What other options are there?
Inconvenient Facts
• Flow may be transient for many years
• Initial best-fit “b” will almost always be greater than unity
• It will decline with time, but this cannot (yet) be predicted
• Some use a terminal decline (or Dmin) to try to prevent
over-estimation of EUR
– Does this work?
– What should the value be?
Forecasting Methodologies
• Extrapolation of decline curves
– Basic
• Arps: exponential, hyperbolic, harmonic, “super-hyperbolic”
• Modified hyperbolic (very common in industry)
– Advanced
• Stretched Exponential Decline Model (SEDM)
• Power-law
• Long-duration linear flow
• Duong model
– We can only use DCA once a well has exhibited decline!
• Analytical models
• Numerical models
• Analogs
– Type curves
Examples of Minimum Terminal Decline
EUR = 6.7
EUR = 8.6
EUR = 10
EUR = 11
EUR = 22
EUR = 7.9
Plot from Fekete Harmony Software
Advanced Decline Methods
• Stretched Exponential Decline Model (SEDM) – Empirical
• 𝑄 = 𝑄𝑖𝑒−(𝑡
𝜏)𝑛
– The EUR is limited to reasonable numbers (unlike b>1)
– Model also fits transient data
• Power Law – Empirical
• 𝑄 = 𝑄𝑖𝑒(−𝐷∞𝑡−𝐷𝑖𝑡𝑛)1
• Same as SEDM when Dinf = 0
– Model also fits transient data
• Linear Flow – Plot of q vs. 1/√(t) is a straight line with slope ½ only when s=0
– Plot of 1/q’ vs. log(t) will be straight line with slope ½ even with s/=0
• Duong Method – Empirical
– 𝑞 = 𝑞1𝑡−𝑛
–𝑞
𝐺𝑝= 𝑎𝑡−𝑚 + 𝑞∞ , 𝑞 = 𝑞1𝑡 𝑎, 𝑚 ,
– t a, m = 𝑡−𝑚𝑒𝑎
1−𝑚(𝑡1−𝑚−1)
Change in EUR with Time (Time limit: 30 yr. or Zero Rate)
1
2
3
4
5
6
7
500 1000 1500 2000 2500
EU
R (
Bcf)
Time (Days)
EUR vs Time
Exp Hyp Dmin=5% PLE Duong Dmin = 10 %
Basic Evaluation and Audit Requirements
• It is crucial that those charged with the preparation of the Reserve
and Contingent Resource estimates are fully conversant with the
relevant definitions
• Each declared volume should be supported by clear references to all
analyses and documentation that were used to derive that number
– This applies whether the audit is carried out by internal or external
advisors
– An adequate audit trail is also a requirement to ensure that the company
is in compliance with SOX reporting
• It is not the intent of an audit that the auditor undertakes a significant
amount of evaluation work, but rather that its role is limited to an
appropriate level of checking
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Conclusions
• Classification of unconventional Reserves and Resources
is governed by the same principles that apply to
conventional hydrocarbon accumulations
– Application of these principles is still a subject of debate
• Reserves can be booked only for projects that meet the
criteria for “commerciality”
– A pilot project is generally needed
• Estimates of GIIP and recoverable volumes per well are
still subject to significant uncertainty
– Actual field experience is still relatively limited
– Assessment tools are still under development
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Final Conclusions
• Know the definitions and guidelines
• Follow company-specific guidelines and procedures
• Use the appropriate methodologies
– And compare with more than one approach
• Be consistent across assets, and time
• Maintain a thorough audit trail
– Documentation is critical to SOX compliance
• And always exercise informed professional judgment
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