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The Economic Vigor (or Fragility?) of Unconventional Oil and Gas in Kansas. K. David Newell, Ph.D. Kansas Geological Survey University of Kansas Lawrence, Kansas. Kansas Oil and Gas Fields. Current Oil and Gas Prices. Late August, 2012 oil price (WTI) = $95/bbl

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The economic vigor or fragility of unconventional oil and gas in kansas

The Economic Vigor (or Fragility?) of Unconventional Oil and Gas in Kansas

K. David Newell, Ph.D.

Kansas Geological Survey

University of Kansas

Lawrence, Kansas



Current oil and gas prices
Current Oil and Gas Prices

  • Late August, 2012 oil price (WTI) = $95/bbl

  • Late August, 2012 natural gas wellhead price = $2.75/mcf

  • On basis of BTUs, approx. 6000 cubic feet of natural gas (i.e., 6 mcf = 1 barrel [bbl]) of oil

  • 6 mcf natural gas fetches $16.50 vs. $95 for oil

  • THEREFORE…unless some prospect represents a potential for prolific rates and volumes of natural gas, no one is now looking solely for it


Generalization

GENERALIZATION

Most companies prefer a return of drilling and completion costs of a producing well in about 2 to 3 years

(operational costs, equipment, dry holes, salt-water disposal wells, etc. have to be paid, but are not included in this calculation)



Kansas coalbed methane production

P

I

Brown

Nemaha

Marshall

KANSAS COALBED METHANEPRODUCTION

Doniphan

Washington

Pottawatomie

Clay

Riley

Atchison

Jackson

Shawnee

Wyandotte

Dickinson

Jefferson

Leavenworth

Johnson

Geary

Osage

Morris

Wabaunsee

Douglas

Franklin

Lyon

Miami

Marion

Chase

Linn

Coffey

Anderson

Harvey

Section with CBM production

Bourbon

Woodson

Sedgwick

Allen

Section with CBM well, no production

Wilson

Crawford

Greenwood

Butler

Gas pipeline

Sumner

Neosho

Cowley

Elk

Humbolt Fault System

(western limit of

Cherokee and Forest

City Basins)

M

Neosho

Cherokee

Chautauqua

Montgomery

Miss.-Penn.

outcrop

25 miles

25 km


CALCULATED CUMULATIVE PRODUCTION CBM WELLS IN SOUTHEASTERN KANSAS(assuming typical declines, 5 mcf/day production shut-down)

250,000

90th-percentile well

4314 mcf/month peak prod.

200,000

233.7 million cubic ft in 23 years

Cumulative

Production

75th-percentile well

150,000

2498 mcf/month peak prod.

mcf

130.3 million cubic ft in 19 years

(thousand

cubic ft)

65th-percentile (average) well

100,000

2000 mcf/month peak prod.

101.4 million cubic ft in 17 years

50th-percentile (median) well

1466 mcf/month peak prod.

71.6 million cubic ft in 15 years

50,000

25th-percentile well

812 mcf/month peak prod.

$125K @ $3/mcf

33.6 million cubic ft in 10 years

10th-percentile well

$125K @ $6/mcf

380 mcf/month peak prod.

$125K @ $9/mcf

8.8 million cubic ft in 4 years

0

0

5

10

15

20

25

years producing


CALCULATED CUMULATIVE PRODUCTION CBM WELLS IN SOUTHEASTERN KANSAS(assuming typical declines, 5 mcf/day production shut-down)

250,000

% of CBM wells paying $125K

drilling & completion costs

in 2 years

8% @ $2/mcf

18% @ $3/mcf

50% @ $6/mcf

70% @ $9/mcf

90th-percentile well

4314 mcf/month peak prod.

200,000

233.7 million cubic ft in 23 years

Cumulative

Production

75th-percentile well

150,000

2498 mcf/month peak prod.

mcf

130.3 million cubic ft in 19 years

(thousand

cubic ft)

65th-percentile (average) well

100,000

2000 mcf/month peak prod.

101.4 million cubic ft in 17 years

50th-percentile (median) well

1466 mcf/month peak prod.

71.6 million cubic ft in 15 years

50,000

25th-percentile well

812 mcf/month peak prod.

$125K @ $3/mcf

33.6 million cubic ft in 10 years

10th-percentile well

$125K @ $6/mcf

380 mcf/month peak prod.

$125K @ $9/mcf

8.8 million cubic ft in 4 years

0

0

5

10

15

20

25

2 years

years producing


Coalbed Natural Gas Wells Drilled per Yearin Eastern Kansas vs. Gas Price

1600

1598

1400

1200

1183

Total Number of Wells with Spud Dates = 7,672

Number of Wells per Year

1000

980

968*

800

687

600

479

400

300

234

200

86

88

78*

70

72

51

52

41

34

31

9

11

12

10

12

11

0

7

7

3

2

0

1981

1985

1990

1995

2000

2005

2009

Year

16

Natural

12

Gas Price

8

($ per

4

MMBTU)

0

1985

1990

1995

2000

2005

2010



Kansas City StarApril 1988“The story of the dying Hugoton gas field, how America handled its natural gas resources and why in the not-too-distant future your gas bills will make you scream”



Coalbed Natural Gas WellsDrilled per Year in Eastern Kansas

1600

1598

KC Star Article

1400

1200

1183

Total Number of Wells with Spud Dates = 7,672

Number of Wells per Year

1000

980

968*

800

687

600

479

400

300

234

200

86

88

78*

70

72

51

52

41

34

31

9

11

12

10

12

11

0

7

7

3

2

0

1981

1985

1990

1995

2000

2005

2009

Year

16

Natural

12

Gas Price

8

($ per

4

MMBTU)

0

1985

1990

1995

2000

2005

2010


Moral of this story

Moral of this Story?

Don’t believe everything that you read in the newspapers?

Bad news always sells?

A pessimist is usually right, given enough time?

The speaker has a long-standing grudge against the KC Star?

NO, NOT NECESSARILY ANY OF THE ABOVE…


What will happen to the price for oil and gas1

What will happen to the price for oil and gas?

ANSWER: It’s hard to predict because it’s governed by many complex factors, some of which are unpredictable


Supply and demand of oil and natural gas thus its price are influenced by
Supply and Demand of Oil and Natural Gas (thus its price) are influenced by:

  • Geology (fewer and poorer wells, supply goes down)

  • State of the Economy (economy up, supply goes down)

  • Tropical Storms (more hurricanes, supply goes down)

  • Winter Weather (temperature down, supply goes down)

  • Producers Reaction to Price (price low, supply goes down)

  • U.S. Dollar (dollar down, supply goes down)

  • Oil-Cartel Behavior (supply usually goes down)



Mississippian limestone play 300 intents 100 wells drilled 45 wells reporting production
Mississippian Limestone Play~300 intents~100 wells drilled45 wells reporting production<<<

Horizontal Wells in Kansashorizontal wells drilled into low-permeable limestone and then hydrofractured>>>


NUMBER OF INTENTS-TO-DRILL IN A SIX-COUNTY TIER ALONG THE OKLAHOMA STATE LINE

INTENTS-TO-DRILL

SOUTHERN AND WESTERN KANSAS

May,

July,

Sept,

Nov,

Jan,

Mar,

May,

July,

2011

2011

2011

2011

2012

2012

2012

2012

50

(half-month time increments. May, 2011 through mid-August, 2012)

45

NUMBER of INTENTS-TO-DRILL for HORIZONTAL WELLS in WESTERN KANSAS

40

May,

July,

Sept,

Nov,

Jan,

Mar,

May,

July,

2011

2011

2011

2011

2012

2012

2012

2012

35

20

30

15

# of

25

# of

Permits

10

Permits

20

5

15

0

10

5

0

(HORIZONTAL INTENTS IN RED)

PERCENTAGE OF WELLS

May,

July,

Sept,

Nov,

Jan,

Mar,

May,

July,

2011

2011

2011

2011

2012

2012

2012

2012

100

90

The growing number of intents-to-drill for horizontal wells in southern and western Kansas

80

70

60

%

50

40

30

20

10

0


“Back-of-the-Envelope” Economics for Mississippian Horizontal Wellsin Kansas

  • ~$3,000,000 drilling and completion costs per horizontal well

  • Two-year pay-out for $3 million requires production of $4110/day income:

    • 41 bbls/day @ $100/bbl

    • 46 bbls/day @ $90/bbl

    • 51 bbls/day @ $80/bbl

    • 59 bbls/day @ $70/bbl


Monthly oil and gas production from mississippian horizontal wells in kansas
Monthly Oil and Gas Production from Mississippian Horizontal Wells in Kansas

BOE (bbls of oil equivalent [6000 cfg = 1 boe])

200,000

2½ % of Kansas O&G production

6,000

5,000

150,000

BOE/mo.

4,000

production

BOE/day

from wells

100,000

first reporting

3,000

in 2012

2,000

50,000

production from

1,000

wells first reporting

in 2011

0

0

2010

2011

2012

YEAR

18 wells reporting production

45 wells reporting production


Pay out rates of some ks horizontal wells
Pay-Out Rates Wells in Kansasof some KS Horizontal Wells

$100,000

$4110/day

458%

(needed income for pay-out in twoyears, assuming cost of $3,000,000 per well)

$10,000

avg. income per day

(based on reported

102% pay out

monthly production &

90%

oil and gas price)

28%

$1,000

32%

$100

1

6

12

18

24

months of production (gas or oil) reported


250 Wells in Kansas

Rig Counts in Midwestern States over Time

Number of Rigs Operating in OK, ND, MT, & KS

200

150

# of

rigs

OK

100

ND

50

KS

MT

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

20%

Number of Rigs Normalized to Total Operating Rigs in USA

15%

% of

US rigs

OK

10%

5%

ND

KS

MT

0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

YEAR


The interplay of rig counts and crude oil price in north dakota

. Wells in Kansas

The Interplay of Rig Counts and Crude Oil Price in North Dakota

150

$150

$ per bbl

100

$100

Monthly

Crude-Oil

Rig

Price

Count

($ per bbl)

50

$ 50

rig count

p

u

l

l

-

b

a

c

k

start of

Bakken

boom

0

$ 0

Jan,

Jan,

Jan,

Jan,

Jan,

Jan,

Dec,

2005

2006

2007

2008

2009

2010

2010


Average production rates 45 kansas mississippian horizontal wells

Monthly data, 1 Wells in Kansasst year of production)

Average Production Rates45 Kansas Mississippian Horizontal Wells

38 bbls/day median

77 bbls/day average

SandRidge Lori #1-2H

(02-T35S-R10W, Barber Co.)

SandRidge Bernice #1-17H

OIL

(07-T35S-R07W, Harper Co.)

SandRidge Lake #1-21H

(bbls/day)

(21-T34S-R06W, Harper Co.)

0

100

200

300

400

500

600

700

SandRidge Bernice #1-17H

SandRidge Ellis #1-19H

(07-T35S-R07W, Harper Co.)

(30-31S-19W, Comanche Co.)

SandRidge Shrock #1-1H

67 boe/day average

(01-T35S-R11W, Barber Co.)

(400 mcf/day)

GAS

SandRidge Lori #1-2H

(boe/day)*

(02-T35S-R10W, Barber Co.)

0

100

200

300

400

500

600

700

(mcf/day)

0

1000

2000

3000

4000

SandRidge Shrock #1-1H

129 boe/day average

(01-T35S-R11W, Barber Co.)

SandRidge Lake #1-21H

SandRidge Lori #1-2H

OIL & GAS

(21-T34S-R06W, Harper Co.)

(02-T35S-R10W, Barber Co.)

SandRidge Bernice #1-17H

(boe/day)*

(07-T35S-R07W, Harper Co.)

714

932

0

100

200

300

400

500

600

700

*

1 boe (barrel of oil equivalent) = 6 mcf)


The health of two kansas unconventional plays
The “Health” of Two Kansas Unconventional Plays Wells in Kansas

  • “Median commodity price” (where 50% of wells pay out in two years or less) for southeastern Kansas CBM play is ~$6/mcf. This play is moribund at the current price of $2.75/mcf.

  • “Median commodity price” (where 50% of wells pay out in two years or less) for Kansas Mississippian Horizontal play is ~$100/bbl. This play is reasonably healthy at the current price of $95/bbl.


The economic vigor or fragility of unconventional oil and gas in kansas1

The Economic Vigor Wells in Kansas(or Fragility?) of Unconventional Oil and Gas in Kansas

K. David Newell, Ph.D.

Kansas Geological Survey

University of Kansas

Lawrence, Kansas


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