1. Option Values of Alternative Completion and Production Strategies in Shale Gas Plays Janie M Chermak, University of New Mexico James Crafton, Performance Science Inc., Robert Patrick Rutgers University 30th USAEE/IAEE North American Conference Washington, DC October 12, 2011

2. Shale Gas Plays

3. “These wells are depleting so quickly that the operators are in an expensive game of catch-up” Aubrey McClendon, 11/2009

4. Shale Gas Plays PRODUCTION - 2008: 2.02 trillion cubic feet (Tcf) - 2009: 3.11 Tcf RESERVES - 860 Tcf, with 410 Tcf from Marcellus (EIA AEO 2011) - 84 Tcf from Marcellus (USGS Aug 2011)

5. Shale Gas Plays Impact of shale gas on the natural gas industry depends on: - actual production meeting forecasts - ultimate recovery

6. Research Actual production - reservoir characteristics - well characteristics - capital choices (completion and re-completion) - production choices Ultimate recovery may depend on - all of the above and - early management production decisions

7. Model Develop a theoretical dynamic optimization model that allows for periodic capital investment over the life of the well. Based on the necessary conditions we develop an econometrically estimable cumulative production function: X is a vector or reservoir characteristics and Z is a vector of completion and production choices. Included in Z are characteristics of the completion job, including the fracture half-length, F i.

8. Model The fracture sub-production function is also a function of reservoir characteristics and completion choices:

9. Model We estimate this simultaneous system of equations using 3SLS and a log-log specification.

10. Data 120 shale gas wells located in the US - 39 horizontal wells - 81 vertical wells all wells began production since 2007 have between 30 and 720 days of production data production data reservoir characteristics completion and production choices

11. Well Characteristics - permeability thickness - Initial Reservoir Pressure - Perforated Interval Completion Choices - Gallons of fracture fluid - Pound of proppant - Barrels per minute - PSIG - Stages - Micro-emulsion concentration - 100 Mesh - 2040 Equivalent Mesh - Winter Fracture - Time between completion start and first production Completion Outcome - Fracture Half-length: final and early - Fracture Conductivity Cumulative Production - 10, 30, 60, 90, 1870, 360, 720 days - Ratio: Production Days to Calendar Days

13. Results The fracture resulting from the completion job is significant and positive for early period production Fracture conductivity significant and positive for vertical wells Micro-emulsion concentration has a positive and significant impact The completion job is significant. For horizontal wells it is how the job is performed (rate and pressure); for vertical wells it is the volumes and how the job is performed.

14. Results Stages are significant and positive for horizontal wells, but not for vertical wells Delay between beginning completion and production significant and negative Ratio is significant and negative Winter completion job negatively impacts vertical well production Decline (all else equal) different. Early period decline 7% larger for horizontal wells

15. Conclusions Shale Gas Plays impacting the US natural gas industry May not be as well understood as we first believed Initial choices may impact well potential Initial choices may impact ultimate recoverable gas Preliminary results suggest vertical and horizontal well productivity are impacted by reservoir characteristics, completion and production choices, but not necessarily in the same manner.