How to Make Better Investment Decisions in Unconventional Projects

Abstract

This article, written by JPT Technology Editor Judy Feder, contains highlights of paper URTEC 198318, “How Not to Squander Billions on Your Next Unconventional Venture,” by Creties Jenkins, SPE, and Mark McLane, SPE, Rose and Associates, prepared for the 2019 SPE/AAPG/SEG Asia Pacific Unconventional Resources Technology Conference, Brisbane, Australia, 18-19 November. The paper has not been peer reviewed. During the past decade, hundreds of unconventional oil and gas projects have failed to deliver the value sought by shareholders. Two common mistakes have been focusing on production attainment instead of value creation, and incorrectly thinking that enough was understood about a given reservoir to proceed with development. Companies must implement a staged approach that exposes capital incrementally in a responsible fashion and an assurance process that provides a framework for conducting and reviewing work so that mistakes may be analyzed to influence future decisions. The complete paper provides a work flow for making better decisions about investing in unconventional projects. Introduction In 2019, an analysis of 16,000 unconventional wells operated by 29 of the largest producers in Texas and North Dakota revealed that these companies spent $112 billion more in cash over the past 10 years than they generated from operations. A primary contributor to this shortfall was optimistic production forecasts based on a small number of early wells. These types of projections lead companies to commit to development projects before they understand the true variability in well performance and, most importantly, whether the average well will be commercial (i.e., able to pay for the cost to drill, complete, and tie in). Commercial is defined here as attaining a present value greater than zero at the corporate discount rate. If this is 10%, a net present value (NPV) of zero equates to a 10% rate of return. The Challenge More than 50 shale plays across North America have been tested for their production potential. Of these, only a dozen or so (approximately 25%) have been commercially developed. Thus, the first order of business is to focus on the right play in the right basin. But even within a productive basin, operators need to be in the commercial fairway, which is commonly a fraction of the total basin area regardless of play type. The probability of commercializing a new unconventional play in a frontier basin is low. Although a well can be drilled practically anywhere in the basin and encounter mobile hydrocarbons, this does not reduce the commercial risk relative to conventional plays. Instead, it transfers the risk (threat of fiscal loss) to later stages, in which it must be shown that unconventional wells can produce at sufficient rates, costs can be reduced to make these wells commercially viable, and results are repeatable.