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What do EUR’s and well costs need to be?
Jessica Garrison, Manager-Global Shale
October 26, 2015
16. Case Studies
Geographic
Location
Completion Capital EUR
Acreage/Well Placement Completion Strategy Operator’s Spending Operator’s Recovery
Karnes, Zavala,
Dimmit
5,600 Feet Average
Lateral
$5 MM Average D&C
350-740 Mboe
Average
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Editor's Notes
- When thinking about a shale play, multiple factors play a role in gauging the importance and viability in an overall drilling campaign. We could spend a great deal of time diving deep into the numerous factors and discussions that impact the valuation of a development operation across multiple operators and regions such as effective negotiations, tax planning, hedging strategies, etc.,
- HOWEVER, if you really break it down into the “big ticket” details that ultimately drive the success and optimization of a drilling campaign, you are left with at least 4 basic concepts. Ultimately, it comes down to the understanding of the maximum capital investment and the minimum EUR that is required to sustain a drilling campaign which will generate a sufficient economic return, given the current market environment. Now, what factors ultimately drive the recovery rates and required D&C?
- It is important to understand what goes into maintaining the business model of generating the ultimate recovery while spending the least amount of money. So, we should ask, “How much money can we feasibly spend?”, “How should we drill?” and most importantly, “Where should we drill?”
Looking to the Geographic Location, “Where should we drill and why?”
-The Eagle Ford shale is considered to be one of the best source rocks available for liquids-rich hydrocarbon exploration. South Texas has long been known to provide world-class oil and gas resources. The Eagle Ford is part of a petroleum system bounded above by the Austin Chalk, a prominent formation that has been conventionally targeted since the early 1980s. The oil’s found within the Austin Chalk formation are considered to be sourced from the Eagle Ford shale, below.
-The Eagle Ford was deposited during a time of anoxia, or a lack of oxygen in the oceans. The lack of oxygen led to severe world-wide extinction events providing the high levels of organic content that is found within the black shales of this time period, such as the Eagle Ford and its sister to the east, the Tuscaloosa Marine.
-Drilling the in the Eagle Ford presents somewhat of a challenge to operators and geologists, alike, given the sizable amount of faulting and trapping occurring in the subsurface, placement of the laterals and completion designs are imperative for generating satisfactory EUR’s over the life of the well.
(Click to bring up Map with zoomed Counties and DEPTH)
The Eagle Ford is inundated by multiple structures that change the depth and isopach, or thickness, of the pay intervals within the complete formation. Beginning along the northern boundary of the play towards Zavala, Frio, Atascosa, and remaining northern counties, the top of the Upper Eagle Ford is relatively shallow, averaging a subsea depth between 4,000-8,000 feet. Shallower depths and cooler temperatures provide the maturation conditions of oil resources as indicated by the green oil window.
As the play progress to the south-southwest, the depth increases at a fast rate until the boundary of the Early Cretaceous Reef system is reached which provides the distinct southern boundary of the formation. As the depth of the shale is increased, the temperature, or geothermal gradient, also increases, providing a more altered environment for thermally mature dry gas.
- Through our analysis of the Eagle Ford, we have selected a grouping of 7 counties that have either long been considered the core, (such as Dimmit, Webb, or La Salle) OR are more recently becoming more and more valuable as a core area., much like Karnes County and its surrounding counties.
- The Eagle Ford is characterized by an Upper Eagle Ford unit and a Lower Eagle Ford unit.
The Lower Eagle Ford is the primary source rock containing organic rich black shales that were deposited as ocean waters transgressed onshore.
(click to bring in the black-box showing the LEF).
The Upper Eagle Ford was deposited during as the ocean waters were regressing offshore. The Upper Eagle Ford has begun to gain notoriety within the industry as multiple top operators have announced the beginning of drill tests targeting the upper intervals to determine its overall productivity and exploitation potential.
Given the multiple structural features and the steep subsea elevation of the formation itself, the Eagle Ford’s hydrocarbons provide a distinct gradient of immature oil thru mature dry gas allowing operators to widen their portfolios and target the hydrocarbon of choice to run an economic campaign.
To be listed as a core county, multiple factors must be met within the data. The underlying geology must have a positive impact for the generation of rich hydrocarbons from near-perfect source rocks; the costs to drill must be low enough to generate positive and high economic returns and the market price must be viable for continued exploration.
While we wish we could control the market price to a greater extent, at this point, we are able to control the costs to drill those wells in the carefully selected target zone’s for our laterals with the intention of generating high production rates and larger EUR’s to boost the economic return of each well.
-Our selection of these counties captures the 2 main geographic regions of interest, the southern prolific dry gas area and the northeastern liquids-rich area.
Geologic research as allowed us to isolate the thermally maturity, isopach or thickness, and the depth of the formation as being the more important factors lending to worthwhile production. After assigning a weighting to each of these geologic base maps based on their importance and overlaying more recent well results, we have generated a map illustrating the overall “sweet spots” or core areas for production. These areas are shown on our map as the red zones, while the blue zones represent the less attractive acreage.
Calculating the annualized 30-year EUR of an average well within the selected counties, Karnes County has isolated itself as showing the highest EUR probability, at an average EUR of 611 MBoe. This is followed somewhat closely by Zavala at 520 Mboe and Dimmit rounding out the top 3 counties in the area.
Activity in the play began with the first discovery well being drilled in 2008 in southwest La Salle County. Since this discovery, activity has exploded into surrounding counties and into the northeastern liquids-rich areas. Focusing on our selected core counties, the majority of initial development began in the wet/gas condensate fairways and moved gradually into the Oil window.
(CLICK TO BRING UP 2014 MAP)
In 2014, the play became more concentrated within the oil window of La Salle, Atascosa, and Karnes County.
(CLICK TO BRING UP 2015 MAP)
Since early 2015, activity has slowed drastically but has still been focused in the wet gas and oil windows. The majority of new drills thus far have been concentrated within Karnes, La Salle, McMullen, and Dimmit County’s.
So what is causing the focus within these specific counties?
Compiling the playwide average D&C cost, we came up with a range between $4.0 million to almost $8.0 million. Through the increasing depths of the formation, it is common that costs should contain this range with the more expensive wells being located to the south.
When comparing these costs to the average lateral lengths, we notice that the range of laterals is pretty significant. Few operators do show laterals less than 5,000 feet and some operators show laterals greater than 10,000 feet. Assigning an average range between 5,000 and 6,000 feet, we notice that the average costs incur between 5,600 and 5,800 feet.
Now, how have the laterals being drilled, changed?
Looking at the average lateral length by county, we come up with a playwide average that skirts between 5,000 and 6,000 feet. Comparing this playwdie average to a county level creates some interesting results.
Tracking lateral length by county, Karnes is the only county to consistently remain below the Eagle Ford Average for each quarter. In the first quarter of 2013, they were below the average by 11% and by the third quarter of 2015, Karnes was below the average by 14%. Increasing its difference by 3 percentage points. This is almost counter-intuitive when the general consensus of the area is to begin moving into the county. However, there are a few top operators who have pioneered the area and have sufficiently drilled their wells, well past the average to lengths greater then 10,000 feet. This leads one to assume that wells within this area do not rely solely on the length of their lateral to generate such high returns. There are other factors at play that push them to the top. All factors such as the costs, completion designs, and area, are the right combination to generate some of the highest EUR averages seen.
Looking deeper into the data, From the first quarter 2015 to the third quarter 2015, Dimmit and Karnes were the only counties to decrease their lateral length by 14% and 3%, respectively. All other counties in focus area increased their lateral lengths by at least 8%. Each of these counties has come out ahead in EUR estimates, pushing them into the top 3 counties of the area. Zavala County is the remaining county listed in the top 3 in terms of its EUR and by looking at the graph shown, it shows some of the highest overall laterals which pinpoints one reason why this county has made it to the top of the list.
Looking at the drilling characteristics even further by comparing the average playwide drilling days with the blue dashed line to each county, we now notice that Karnes County has significantly decreased its overall average drilling days. Much like La Salle and McMullen Counties have also achieved.
Zavala County has increased its average drilling times since 2014, as the average lateral length increased. Now, with the onset of activity slowdowns, the average lateral lengths has begun to fall and we believe that the average drilling days for the county will also reach a plateau or decrease.
When calculating our EUR’s we of course begin with a type curve.
Follow process on screen.
- We have calculated a type curve for all wells that were drilled and began production from January 2013 through September 2015.
Our county-level EUR estimates have ranked the selected counties by their calculated average EUR’s.
Karnes County, as we have seen already, provides some top-tier acreage and its EUR result further justifies its position at the top of our list. Of the 373 wells used within our analysis, the resulting average EUR was 738 Mboe and the median was 396 Mboe. This relatively large spread between the average and the median illustrates the existence of some very large wells.
Zavala and Dimmit both show practically identical average EUR estimates with Zavala at 566 Mboe and Dimmit at 529. Within the last 2 years, very few wells have been completed within Zavala County, however, even with a small dataset, the results thus far have indicated that Zavala could be one of the next big oil producing areas if well costs can continue to show a downward trend.
Now that we have discussed locations, typical capital spending and various completions, how do all of those parameters match up to affect the NPV?
In the recent weeks, we have seen market prices reach some incredible lows and fluctuate above the $50/bbl mark for WTI. On a playwide basis, we have assigned the average drilling and completion cost to $5.0 million to be used within our analysis, however, some operators have shifted costs to as low as $4 million or less.
Under the current market conditions of an average cost per bbl at approximately $48 at the time of our analysis, the total playwide results indicate that the cost per bbl of crude must reach between $50 to $55 in order to generate positive NPV’s at a D&C of $5.0 million per well.
Plus or minus $1.00 million per well is equal to approximately $5.00/bbl on the breakeven.
From January 2013 thru December 2013, the county averaged between 35-55 well completions per month. In 2014, that average shifted to between 50-60 with November 2014 showing over 70 wells being completed.
Moving into 2015, completions dropped significantly given the falling oil market. In the most recent months, Karnes has showed an increase in its gas production outputs and the start of increased well completions.
We calculated a set of 5 type curves for each county to represent the relative spread of the wells behavior as shown in the left graph.
The average EUR for the county as a whole was found to be 738 Mboe, representing the largest estimate ultimate recovery of any of the selected counties.
Wells within this county have shown massive initial production rates while others remain more conservative for the first few months of production.
Despite price cuts and large shifts away from premium proppant to a larger use of sand, Karnes County is continuing to pump wells with sand and a resin tail-in, representing almost half of the market during the third quarter of 2015.
Frac jobs have remained steady overtime, with most recent time periods showing a higher percentage of Slickwater fracs than ever before, representing 25% of the market share within the county.
Karnes have been given a large share of the activity throughout the play. The economics also prove favorable for continued development.
Utilizing the playwide average cost of $5.0 million per well, a drilling campaign becomes positive around $35/bbl. At the current market price near $48/bbl, the majority of current campaigns show positive returns if all other metrics are also
Despite fluctuations, approved Permits in Zavala County increased from Q1 2013 to Q2 2014 by 97% and then began to fall at an average rate of 31% to their lowest point in Q3 2015.
Zavala County had the lowest volume of horizontal well completions compared to other counties in this analysis. The largest volume of well completion seen in the timeframe were 20 in Q4 2014 when the market peaked. By Q3 2015, completions dropped by 70%.
Zavala’s average EUR came in 2nd of our selected counties at an average of 566 Mboe. The medium EUR was not far from that at 442 Mboe.
In 2014, completions in the county increased to its highest level with 20 wells being completed during the fourth quarter.
After its peak at the end of 2014, completions have steadily decreased with the overall market share of completions being held by 1 operator. (EXCO Resources)
Given the average EUR’s present within the county, Zavala could easily become another producing hot spot if costs and market prices are kept in check.
In Zavala County, the main proppant type dominating the market is sand only. The only two quarters to show a significant amount of premium proppant use are Q3 2013 with Sand + Ceramics at an 11% market share and Q3 2015 with Sand + Resin at a 23% market share.
The main frac job type used in Zavala County has fluctuated between Cross Link and Hybrid: Slickwater with Cross Link. By Q3 2015, Slickwater, Cross Link, and Hybrid: Slickwater with Cross Link evenly shared the market as opposed to Q2 2015 where Cross Link was the only frac job used.
Zavala may have great hydrocarbons and the potential for large EUR’s, but the economics are a bit challenged which explains the decrease in completions and permitting in 2015.
At the current market price near $48/bbl, operators within the county would need to lower their well costs to $4.0 MM or lower well.
When looking at the playwide average D&C of $5.0 Million/well, the market price would need to increase by almost 25% in order to show positive economics.
In most recent months, completions appear to be rebounding, increasing 6% in August over July 2015. This is a big change since completions have been in a steady decline since the beginning of 2015.
-Operators who hold the largest permit market shares vary in severity of decline year-over-year.
Dimmit rounds out the top 3 counties in terms of their average EUR’s. The average EUR for Dimmit at 529 Mboe is near the estimate shown for Zavala, however, Dimmit has seen activity for many more years and at an increased rate.
Dimmit saw a elevated level of permits being approved during the second half of 2014 to its high point of over 140 approved permits in September 2014. Since then, the rate of approved permits has steadily dropped, seeing its low point hit less than 20 permits in January 2015.
In the recent months, permits have shown a slight increase as operators seem to be returning activity to the county.
Despite price cuts and large shifts away from premium proppant to a larger use of sand, Dimmit County is continuing to pump wells with sand and a ceramic tail-in, representing over 35% of the market during Q3 2015.
Overtime, there has been a clear shift away from Slickwater frac jobs and towards a larger portion of Slickwater/Crosslink hybrid jobs and Crosslink jobs.
-Despite coming in 3rd for EUR’s, Dimmit County shows better economics then its second place rival, Zavala.
-In the current market, the play’s average well cost of $5 million/well, fairs well within Dimmit County, already showing positive economics.
-As operators lower well costs and if they already have, they can achieving positive economics as low as $40/bbl at WTI.
To sum it all up- the region has some notable challenges, but on a portfolio and drilling campaign basis, these challenges can be overcome. In today’s market, more consolidation or carefully planned drills could fuel the fire for returning to an activity balance within the play.
As we have seen, 3 counties come out far ahead of the rest of the play and can be named premier assets who are faring well in the current market. Recently, we have seen operators reallocating budgets and making much more subdued decisions in forward-looking strategy and this will likely continue in the short term unless the assets available in the play can be drilled within the cost and completion constraints needed to boost revenue.
When considering all metrics discussed, Karnes County came out ahead of our ranking as the top county in terms of productivity and economics. Production with Karnes has the ability to withstand the falling market and can provide operators with generous returns. All else being equal, the market price could drop by almost 25% and Karnes could withstand that impact.
Dimmit is following on the heels of Karnes. Market prices are already in the economics range but they would need rise by 4% to make the county total positive.
We believe that there are regions within the play that cab truly withstand the depressed state of our markets and come out ahead when the market picks up. Of course there are other counties and regions that wont be able to provide a launch platform at the first sight of raised markets, but there are a few that will provide this to the current and future operators alike.
Thank you very much for your time and attention. I wish you all the best for your remaining time and the conferences!
