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 !!!!!!!!

2 © 2013 Gaffney Cline & Associates. All Rights Reserved

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


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


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

PRMS Framework


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


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”.


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


Types of Unconventional Resources

• Extra-Heavy Oil/Bitumen

• Tight Gas Formations

• Coalbed Methane

• Shale Gas

• Oil Shale

• Gas Hydrates


optional

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

11 © 2012 Gaffney, Cline & Associates. All Rights Reserved.

EIA

Fractured Horizontal Well Schematic


Source: ESG Solutions

And this is What it Really Looks Like … 52,000 HP in the Woodford Shale


$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

© 2013 Gaffney Cline & Associates. All Rights Reserved 15

Key Elements for the sustainable development

of hydrocarbon resources


Hypothetical Development under a 25-year -

Schematic


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??


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


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


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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