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

The Economic Vigor The Economic Vigor (or Fragility?) (or Fragility?)

of Unconventional Oil of Unconventional Oil and Gas and Gas in Kansasin Kansas

K. David Newell, Ph.D.K. David Newell, Ph.D.Kansas Geological SurveyKansas Geological Survey

University of KansasUniversity of KansasLawrence, KansasLawrence, Kansas

Kansas Oil and Gas Kansas Oil and Gas FieldsFields

Current Oil and Gas Current Oil and Gas PricesPrices

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

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

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

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

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

GENERALIZATIOGENERALIZATIONN

Most companies prefer a Most companies prefer a return of drilling and return of drilling and completion costs of a completion costs of a

producing well in about 2 to producing well in about 2 to 3 years3 years

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

included in this calculation)included in this calculation)

Types of Oil and Gas Types of Oil and Gas WellsWells

Section with CBM production

Section with CBM well, no production

Gas pipeline

Miss.-Penn.outcrop

MPI

Humbolt Fault System(western limit of

Cherokee and ForestCity Basins)

Chautauqua Montgomery Neosho Cherokee

Crawford

Bourbon

Linn

Miami

Johnson

Wyandotte

LeavenworthJefferson

Douglas

Shawnee

Atchison

Doniphan

BrownNemahaMarshall

Washington

RileyClay

Wabaunsee

Jackson

Pottawatomie

Geary

Dickinson

Morris

Franklin

Osage

Lyon

CoffeyAnderson

Woodson

Allen

Wilson

Neosho

Elk

Greenwood

Butler

Chase

Marion

Harvey

Sedgwick

Sumner Cowley

25 miles 25 km

KANSAS COALBED METHANE

PRODUCTION

CALCULATED CUMULATIVE PRODUCTION CALCULATED CUMULATIVE PRODUCTION CBM WELLS IN SOUTHEASTERN KANSASCBM WELLS IN SOUTHEASTERN KANSAS

(assuming typical declines, (assuming typical declines, 5 mcf/day production shut-down)5 mcf/day production shut-down)

0 5 10 15 20 250

50,000

100,000

150,000

200,000

250,000

mcf(thousandcubic ft)

years producing

90th-percentile well4314 mcf/month peak prod.233.7 million cubic ft in 23 years

65th-percentile (average) well2000 mcf/month peak prod.101.4 million cubic ft in 17 years


50th-percentile (median) well1466 mcf/month peak prod.71.6 million cubic ft in 15 years


10th-percentile well380 mcf/month peak prod.8.8 million cubic ft in 4 years $125K @ $9/mcf

$125K @ $6/mcf

$125K @ $3/mcf

CumulativeProduction

CALCULATED CUMULATIVE PRODUCTION CALCULATED CUMULATIVE PRODUCTION CBM WELLS IN SOUTHEASTERN KANSASCBM WELLS IN SOUTHEASTERN KANSAS

(assuming typical declines, (assuming typical declines, 5 mcf/day production shut-down)5 mcf/day production shut-down)

0 5 10 15 20 250

50,000

100,000

150,000

200,000

250,000

mcf(thousandcubic ft)

years producing


65th-percentile (average) well2000 mcf/month peak prod.101.4 million cubic ft in 17 years


50th-percentile (median) well1466 mcf/month peak prod.71.6 million cubic ft in 15 years


10th-percentile well380 mcf/month peak prod.8.8 million cubic ft in 4 years $125K @ $9/mcf

$125K @ $6/mcf

$125K @ $3/mcf

% of CBM wells paying $125Kdrilling & completion costs

in 2 years 8% @ $2/mcf18% @ $3/mcf50% @ $6/mcf70% @ $9/mcf

CumulativeProduction

2 years

1995 2000 2005

Number of Wells per Year

1985 199019810

200

400

600

800

1000

1200

1400

1600

Year

Total Number of Wells with Spud Dates = 7,672

7 9 0 7 11 12 3 2 10

70 86 8851

3412 11

31 41 52 72

234

300

479

980

687

1598

1183

968*

78*

2009

NaturalGas Price

($ perMMBTU)

20001990 1995 200519850

4

8

12

16

2010

Coalbed Natural Gas Wells Drilled Coalbed Natural Gas Wells Drilled per Yearper Year

in Eastern Kansas vs. Gas Pricein Eastern Kansas vs. Gas Price

What will happen What will happen to the price for oil to the price for oil

and gas?and gas?

Kansas City Kansas City StarStar

April 1988April 1988

“The story of the “The story of the dying Hugoton dying Hugoton gas field, how gas field, how

America handled America handled its natural gas its natural gas resources and resources and why in the not-why in the not-

too-distant too-distant future your gas future your gas bills will make bills will make you scream”you scream”

0

100

200

300

400

500

600

700

800

900

1000

19

30

19

35

19

40

19

45

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

An

nu

al

Ga

s P

rod

uc

tio

n (

Bc

f)

0

5

10

15

20

25

30

35

40

45

Cu

mu

lati

ve

Pro

du

cti

on

(T

cf)CBM

Other

Hugoton

Panoma

Cumulative

Kansas Gas Production Kansas Gas Production 1930-2007 1930-2007

KC Star Article

1995 2000 2005

Number of Wells per Year

1985 199019810

200

400

600

800

1000

1200

1400

1600

Year

Total Number of Wells with Spud Dates = 7,672

7 9 0 7 11 12 3 2 10

70 86 8851

3412 11

31 41 52 72

234

300

479

980

687

1598

1183

968*

78*

2009

NaturalGas Price

($ perMMBTU)

20001990 1995 200519850

4

8

12

16

2010

Coalbed Natural Gas WellsCoalbed Natural Gas WellsDrilled per Year in Eastern KansasDrilled per Year in Eastern Kansas

KC Star Article

Moral of this Moral of this Story?Story?

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

Bad news always sells?Bad news always sells?

A pessimist is usually right, given enough time?A pessimist is usually right, given enough time?

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

NO, NOT NECESSARILY ANY OF THE NO, NOT NECESSARILY ANY OF THE ABOVE…ABOVE…

What will happen What will happen to the price for oil to the price for oil

and gas?and gas?ANSWER: It’s hard to predict ANSWER: It’s hard to predict because it’s governed by many because it’s governed by many complex factors, some of which complex factors, some of which

are unpredictableare unpredictable

Supply and Demand Supply and Demand of Oil and Natural Gas of Oil and Natural Gas

(thus its price) are influenced (thus its price) are influenced by:by:

Geology Geology (fewer and poorer wells, supply goes down)(fewer and poorer wells, supply goes down) State of the EconomyState of the Economy (economy up, supply goes (economy up, supply goes

down)down) Tropical StormsTropical Storms (more hurricanes, supply goes down) (more hurricanes, supply goes down) Winter WeatherWinter Weather (temperature down, supply goes (temperature down, supply goes

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

down)down) U.S. Dollar U.S. Dollar (dollar down, supply goes down)(dollar down, supply goes down) Oil-Cartel BehaviorOil-Cartel Behavior (supply usually goes down) (supply usually goes down)

Oil Shale and Gas Shale Oil Shale and Gas Shale

MississippiaMississippian Limestone n Limestone

PlayPlay ~300 intents~300 intents

~100 wells drilled~100 wells drilled45 wells reporting 45 wells reporting

productionproduction <<<<<<Horizontal Horizontal Wells in Wells in

KansasKansas horizontal wells horizontal wells drilled into low-drilled into low-

permeable permeable limestone and limestone and

then then hydrofracturedhydrofractured

>>>>>>

The growing The growing number of number of

intents-to-drill intents-to-drill for horizontal for horizontal

wells in southern wells in southern and western and western

KansasKansas

INTENTS-TO-DRILLSOUTHERN AND WESTERN KANSAS

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

20

10

0

15

5

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

# ofPermits

50

40

30

20

10

0

45

35

25

15

5

100

40

20

0

30

10

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

(HORIZONTAL INTENTS IN RED)PERCENTAGE OF WELLS

# ofPermits

May,2011

July,2011

Sept,2011

Nov,2011

Jan,2012

Mar,2012

May,2012

July,2012

90

%

80

60

70

50

May,2011

July,2011

Sept,2011

Nov,2011

Jan,2012

Mar,2012

May,2012

July,2012

May,2011

July,2011

Sept,2011

Nov,2011

Jan,2012

Mar,2012

May,2012

July,2012

““Back-of-the-Envelope” Back-of-the-Envelope” Economics for Economics for

Mississippian Horizontal Mississippian Horizontal WellsWells

in Kansasin Kansas ~$3,000,000 drilling and completion ~$3,000,000 drilling and completion costs per horizontal wellcosts per horizontal well

Two-year pay-out for $3 million Two-year pay-out for $3 million requires production of $4110/day requires production of $4110/day income:income: 41 bbls/day @ $100/bbl 41 bbls/day @ $100/bbl 46 bbls/day @ $90/bbl46 bbls/day @ $90/bbl 51 bbls/day @ $80/bbl51 bbls/day @ $80/bbl 59 bbls/day @ $70/bbl 59 bbls/day @ $70/bbl

0

50,000

100,000

150,000

200,000

2010 2011 2012

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

production fromwells first reporting

in 2011

productionfrom wells

first reportingin 2012

BOE/mo.

YEAR45 wells reporting production

0

5,000

BOE/day4,000

3,000

2,000

1,000

6,000

18 wells reporting production

2½ % of Kansas O&G

production

Monthly Oil and Gas Production Monthly Oil and Gas Production from Mississippian Horizontal from Mississippian Horizontal

Wells in KansasWells in Kansas

Pay-Out RatesPay-Out Ratesof some KS Horizontal of some KS Horizontal

WellsWells

1 6 12 18 24

$10,000

$1,000

$100,000

avg. income per day(based on reported

monthly production &oil and gas price)

months of production (gas or oil) reported

$100

$4110/day(needed income for pay-out in two years, assuming cost of $3,000,000 per well)

102% pay out

32%

28%

458%

90%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

5%

10%

15%

20%20000

50

100

150

200

250

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

YEAR

% of US rigs

# ofrigs OK

ND

KS

Number of Rigs Normalized to Total Operating Rigs in USA

OK

NDKS

MT

MT

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

Rig Rig Counts Counts

in in MidwesteMidwestern States rn States

over over TimeTime

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

North DakotaNorth Dakota.

0

50

100

150

Jan,2005

Jan,2006

Jan,2007

Jan,2008

Jan,2009

Jan,2010

Dec,2010

Crude-OilPrice

($ per bbl)

MonthlyRig

Count

$ 0

$ 50

$100

$150

start ofBakkenboom

$ per bbl

pull-back

rig count

Average Production RatesAverage Production Rates45 Kansas Mississippian Horizontal Wells45 Kansas Mississippian Horizontal Wells

0 100 200 300 400 500 600 700

0 200 300 400 500 600 700

0 100 200 300 400 500 600 700

Monthly data, 1st year of production)

OIL(bbls/day)

GAS(boe/day)*

OIL & GAS(boe/day)*

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

77 bbls/day average

67 boe/day average(400 mcf/day)

129 boe/day average

SandRidge Bernice #1-17H(07-T35S-R07W, Harper Co.)

SandRidge Lori #1-2H(02-T35S-R10W, Barber Co.)

SandRidge Lake #1-21H(21-T34S-R06W, Harper Co.)


SandRidge Shrock #1-1H(01-T35S-R11W, Barber Co.)


SandRidge Ellis #1-19H(30-31S-19W, Comanche Co.)

0 1000 2000 3000 4000

100

(mcf/day)


714 932


SandRidge Lake #1-21H(21-T34S-R06W, Harper Co.)

SandRidge Shrock #1-1H(01-T35S-R11W, Barber Co.)

38 bbls/day median

The “Health” of Two Kansas The “Health” of Two Kansas Unconventional PlaysUnconventional Plays

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

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

The Economic Vigor The Economic Vigor (or Fragility?) (or Fragility?)

of Unconventional Oil of Unconventional Oil and Gas and Gas in Kansasin Kansas

K. David Newell, Ph.D.K. David Newell, Ph.D.Kansas Geological SurveyKansas Geological Survey

University of KansasUniversity of KansasLawrence, KansasLawrence, Kansas

Documents

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