Gas economics in the Barnett Shale

(The following is an excerpt from Fracked In The Barnett Shale, by Dr T.L. Hayden)

As we have seen, the economics of the Barnett Shale depend on the cost of drilling and production, the amount of gas that can be ultimately recovered and especially the price of the gas. The cost of drilling and fracking was reduced substantially by Mitchell and continues today with further technical developments. A ballpark figure is $3 million drilling cost in the Barnett Shale and that doubles in the deeper Haynesville Shale. To get maximum return and protection one must employ all the advanced technical methods, and yet costs can run from $4 million to more than $10 million.

The total rate of recovery is better known now than when Mitchell began operations and continues to improve. Not all analysts agree on the total recovery and some feel the present predications and even the cost effectiveness of horizontal vs. vertical drilling is still in question. For example, Arthur Berman argues that the average life of a Barnett Shale well is around 7.5 years (not 25) and a horizontal well only gives a 31% improvement in reserves for 2.5 times the cost of a vertical well.

For conventional oil plays where water injection is used to recover O&G in a declining field, the partial differential equation models and also field data indicate that the injection rate and pressure should be at a minimum to have maximal oil recovery. The present value of money encourages the O&G industry to recover the resource as quickly as possible. However, too much pressure induces the water to penetrate along some weakened fracture directly toward the oil extraction well. This

“fracture pipe” leaves behind the oil in the surrounding region and begins to produce water in the O&G well. Hence many slowly declining oil fields suddenly undergo a precipitous drop in production. This possibility and the world wide implications for future energy supplies are discussed by Matthew Simmons in his book, “Twilight in the Desert – the Coming Saudi Oil Shock and the World Economy” published by Wiley in 2005.

However, the largest uncontrollable factor in the development of the Barnett Shale is the price of natural gas. The rate largely depends on supply and demand in the U.S. but also varies with the political instability of OPEC. It is still boom or bust in the Barnett Shale.

The estimated well head price of gas in Aug. 2010, according to U.S. Energy Information Service, was $4.22 per thousand cubic feet or $4.10 per million BTU (which is how it is priced on the future markets and by the pipeline gatherers). This assumes an average heat content of 1,029 BTU per cubic foot. At the same time West Texas Crude September spot price was $75.92 per barrel or $13.09 per million BTU (conversion 5.80 million BTU per barrel). At the present time, Barnett Shale wells are not profitable if the price of gas is below $4. For example, in October of 2010, Williams withdrew an application to drill 15 wells on one site in Double Oak (Denton County) when additional environmental drilling restrictions were proposed and the price of gas dipped below $4 even though they had invested considerable money on gas leases that would expire in 2010. When the price of gas approaches $6 to $8 one notices a surge of aggressive activity to lease and drill as fast as possible.