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Drilling and completion
Drilling and completion is the main cost in shale gas plays. In 2009, the average onshore horizontal gas well in the US was drilled an average of 10,025 ft at a cost of $8.6 million, or $842/ft, according to the American Petroleum Institute. The average Haynesville well has a measured depth of 16,654 ft and would have been expected to cost $14 million in 2009.
In the third quarter of 2008, Chesapeake Energy Corp. reported that the drilling and completion cost of a Haynesville well averaged $9.5 million and required 64 days from spud to rig release. By the second quarter of 2009, well construction cost $7.9 million and required 47 days to rig release.
In 2010, Encana spent $1.261 billion and drilled 106 wells in the Haynesville for an average $11.9 million/well. In 2009 and 2008, Encana reported spending $541 million and $137 million and drilling 49 and 7 wells, or $11 million/well and $19.6 million/well, respectively.
Lease operating expenses
Lease operating expenses (LOE) are those costs associated with work physically performed at the work site or specifically and exclusively for operations.
Operating costs vary between leases and with the inventory of producing wells and change with commodity prices (because of changes in lease fuel and production taxes); age (chemical treatment and monitoring, corrosion, and scale); the number and type of wells and surface facilities; product stream (gas, oil/gas) and volume; water production and disposal options; and well servicing requirements (workovers).
EXCO Resources reported Haynesville shale LOE for 2010, 2009, and 2008 as $0.50/Mcf, $0.80/Mcf, and $0.85/Mcf; workover expenses are reported as $0.11/Mcf, $0.12/Mcf, and $0.14/Mcf. Chesapeake reported Haynesville/Bossier shale production expenses and ad valorem tax expenses for 2010, 2009, and 2008 to be $0.27/Mcf, $0.39/Mcf and $1.33/Mcf, respectively.
General and administrative
General and administrative (G&A) expenses covers payroll, media relations, stock-based compensation, and associated costs excluding cost capitalized to properties. Company size, property distribution, and number of administrative staff and compensation impact G&A expenses.
Chesapeake reported G&A expenses as $0.45/Mcf, $0.38/Mcf, and $0.45/Mcf for 2010, 2009, and 2008, respectively.
Model assumptions
Shale plays are exposed to the same price uncertainty impacting conventional production, but because of high initial production rates and steep decline, exposure is concentrated across a much smaller time window which amplifies the potential investment risk.
The price received for natural gas is largely a function of regional supply and demand conditions which is impacted by general economic conditions, storage volumes, weather, and other seasonal conditions, including hurricanes and tropical storms. Gas prices are assumed to be flat over the life cycle of production and range between $4 and $10/Mcf.
Royalty is levied on gross production at a rate of 20-30%. Well-spacing requirements are assumed to range from 80 to 640 acres/well. Production is assumed gas with no commercial liquids.
In 2010, most wells in the Haynesville were drilled and completed for $7 million-$10 million. We assume capital expenditures range between $5 million and $15 million and include the cost to tie in to existing infrastructure.
LOE is assumed to range between $0.25 to $2/Mcf. We assume no additional capital expenditures (e.g., restimulation) are required through the production life cycle. Unit cost of production increases over time because of the need for compression, maintenance related to corrosion, equipment repairs, water treatment and disposal, etc., but we consider LOE constant and do not inflate. G&A expenses are not considered.
Gas wells that produce more than an average monthly rate of 250 Mcfd are charged a severance tax that is adjusted annually. Severance tax rates are correlated with gas price and vary approximately linearly from $0.18/Mcf for $4/Mcf gas to $0.45/Mcf for $10/Mcf gas.
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