SPE 108081

Stochastic Modelling of Shale Gas Resource Play Economics

Charles Stabell, SPE, Rosella Gonzales, SPE, and Espen Langlie, GeoKnowledge AS

Copyright 2007, Society of Petroleum Engineers

This paper was prepared for presentation at the 2007 SPE Hydrocarbon Economics and
Evaluation Symposium held in Dallas, Texas, U.S.A., 13 April 2007.
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Abstract
Unconventional petroleum resource plays present unique
assessment challenges. These large, single accumulations
cannot be counted and analysed as discrete entities that are
delineated by down-dip water contacts. Equally important, the
main assessment challenge relates to exploitation risks and
uncertainties. This paper presents an integrated stochastic
assessment framework for decisions related to shale gas
resource plays. The shale gas resource play is modelled as a
set of discrete cells that have not been explored (exploited)
and that have the potential for economic production. The
distinctive aspect of the modelling tool is the use of stochastic
simulation to calculate the risks of failure in either the
exploration, the appraisal/pilot, or the exploitation phases of
the project on the basis of both sub-surface uncertainties and
above-surface activity performance, cost and duration
uncertainties. The tool also generates stochastic performance
metrics that capture alternative outcome scenarios, economic
returns and the delivery schedule of production and reserves.
The performance metrics support both project-level and
portfolio-level decisions related to unconventional resource
plays. Project-level application is illustrated using data from a
Canadian shale gas resource play.
Introduction
Unconventional petroleum assets are large single
accumulations. They form a geologically diverse group, but
include coal-bed methane (CBM), tight gas and fractured shale
gas.
All unconventional petroleum assets share some
important characteristics:
they are often very large
accumulations, many of the largest accumulations are known
in the sense that we know where they are: The assets cannot
be counted and analysed as discrete entities that are delineated
by down-dip water contacts (Schmoker, 1999) as are
conventional accumulations and fields. They are therefore
also frequently referred to as continuous accumulations.

Unconventional petroleum assets present unique

assessment challenges. Estimates of in-place resources are not
very useful as recovery is key. Exploration is more like
appraisal, where the key decision is made after doing a pilot
test production that can prove the potential for commercial
production. Commercial production is often an issue of
investing in innovations that can facilitate effective,
manufacturing-style exploitation where scale is key. And the
key to commercial success is identification and exploitation of
what are potentially unevenly distributed and sparse number
of sweet spots. Referring to the localization of sweet spots in
coal based methane plays, Donovan (2001) states 75% of the
production in the San Juan Basin comes from 35% of the wells
on 5% of the acreage.
This paper presents the application of a framework for
integrated risk resource and economic value assessment of
unconventional petroleum assets (Stabell, 2005) that has been
applied to shale gas plays. The illustrative example is from a
potential Canadian shale gas play.
The analysis framework builds on the FORSPAN model
developed by the USGS (Schmoker, 1999, 2002). FORSPAN
is a stochastic geology- and engineering-based model for
assessment of the petroleum resources that can be recovered in
a finite forecast span (FORecast SPAN) from continuous
(unconventional) petroleum accumulations. Each continuous
petroleum accumulation is viewed as composed of a set of
discrete cells that have not been explored (exploited) and that
have the potential for economic production. Each cell is the
drainage area of a well. Assuming uniform well spacing, then
draining area and well spacing are synonymous model
parameters. Recoverable volumes can vary between cells,
with some cells being non-commercial.
One of the key elements in the framework is that it
includes modelling of the activities and economics of
exploring and exploiting the resource play with explicit
attention to costs, durations and production in order to
generate after-tax cash flow profiles.
Another important
element is the use of the sweet spot as the analytical unit of
analysis for both the assessment of the potential resources in
the unconventional asset and the modeling of how the asset is
explored and exploited. A sweet spot is a collection of cells
where production characteristics are particularly favorable.
The shorthand notation for the integrative framework is
therefore also SWEETR, for SWEET spot Resources
(Stabell, 2005).

There are a number of earlier published models and

approaches that are similar in that they include explicit
modelling of exploration and exploitation activities with
consideration of economic returns (see for example, White,
1981, Power and Jewkes, 1992, UGRSS, 2001). However, the
design of SWEETR reflects that the analysis framework is
directed at supporting decisions concerning investments in
technology improvement, asset acquisition and exploitation of
unconventional petroleum assets. Most of the other published
models have been directed at assessing reserves and
production potential for public policy making and resource
management. A notable exception is the approach advocated
by Haskett and Brown (2005).
The rest of the paper is organized as follows. First we
briefly review the Canadian shale gas scene. We then present
the analysis framework. In the following sections we review
in more detail the modelling of the in-place resources in a
single sweet spot as well as the model for
exploration/appraisal and exploitation of the single sweet spot.
The concluding discussion contrast and compares SWEETR
application to shale gas plays with other approaches.
In rest of this paper we use the term resource play as a
short hand notation for unconventional petroleum asset. We
think this label (that we have borrowed from Encana (2005) is
useful as it captures that the resources in the unconventional
petroleum asset are most often identified. The challenge is to
transform the resources into recovered reserves.
Canadian Shale Gas Plays
Shale gas plays are getting increasing interest in Canada
(Roche, 2006). The effort is however much less advanced
than in the US. There is therefore also much less public
information available for third-party assessments.
In this
paper we have considered broadly a potential play in eastern
British Columbia related to the Devonian Ireton and Duvernay
formations. The figures used are solely meant to be
illustrative where data in part is based on the assumption that
the target shale gas resource play might be viewed as a Barnett
Shale analog.
Integrated Modelling Framework
The modelling framework is an extended version of the
SWEETR framework (see Stabell, 2005).
The main
extensions involve the resource assessment module that can
explicitly handle both shale gas and CBM resource plays. It
also includes a new component for modelling the pilot
production that captures the appraisal phase of sweet spot
exploration. In addition single cell production uses a
hyperbolic model. Finally, the different components have
been implemented in an integrated software package.
Overview of framework
The SWEETR analysis framework consists of a set of distinct,
but interrelated modules that are used to estimate the number
and size of sweet spots in the resource play, to model the

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exploration for the sweet spots and the exploitation of

discovered sweet spots. Sweet spot exploitation consists of the
drilling and production of the cells in the sweet spot. The cell
is the basic analysis unit when modeling sweet spot
exploitation. The sweet spot is the basic analysis unit in the
modules that are used to estimate the number and size of sweet
spots in the resource play and model the exploration of the
resource play.
The overall logic of the analysis framework is quite simple
(Figure 1). The assessment module is used to estimate the
ultimate number of sweet spots in the resource play. The
resource play exploration models the pilot production required
to verify identification of a sweet spot in the play. The sweet
spot exploitation module models the drilling and production of
petroleum from the cells in a discovered sweet spot.

Assessment of Resource Play

Size distribution of
Sweet Spots

Resource Play
Exploration & Exploitation
Technology
Investment

Exploration for
Sweet Spot

Sweet Spot Exploitation

Sweet Spot
infrastructure

Single Cell
drilling & production

Resource Play
HC & AT Cash Flows

HC & After Tax

Cash Flows

Figure 1. Analysis Framework

The output of the risk, resource and value assessment is a

stochastic estimate of economic returns from investing in the
resource play based on generation of stochastic net cash flow
profiles as well as petroleum production profiles.
Assesment of resource play
The unit of analysis in the resource play is the sweet spot. A
sweet spot is a collection of cells. A cell has a standard area
and is usually the drainage area of a single well or the spacing
of wells. The in-place resources in a cell are estimated by a
yield per cell area.
The areal extent of the untested portion of the resource
play defines a maximum number of cells. Sweet spots can
have a variable number of cells that are represented by a
probability distribution.
The number of potential sweet spots is also represented by
a probability distribution. The number of potential sweet spots
and the size distribution of sweet spots will typically be
negatively correlated in order to reflect that there is a finite
amount of untested cells in the resource play.
The probability of finding a sweet spot defines the number
of sweet spots in the resource play. SWEETR is primarily

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aimed at proven resource plays. The probability of the

existence of the resource play is therefore set to 1.0. The
framework can however also deal with frontier (unproven)
resource plays.
The cells in a sweet spot can be viewed as contiguous,
although the important implication is that they share a
meaningful threshold in terms of shared investments and
infrastructure. As is apparent in modeling of the exploration
and exploitation of the resource play, besides the number and
size of the sweet spots, the other important implication of a
finite number of sweet spots is that there is a probability of
exploring what turns out to be a sour spot the equivalent
of a dry hole in conventional resource exploration. There is a
minimum sweet spot size.
Both the estimated size distribution and the number of
sweet spots need to be calibrated to reflect the level of
technology for exploiting the unconventional petroleum
resources in the resource play.

determines which of the remaining undiscovered sweet spots

in the resource play that has been identified.
An exploration capacity parameter controls how many
pilots on the resource play can be in progress at the same time.
A failure tolerance in terms of number of failed pilots can stop
further exploration of a resource play.
Failure pilots and success pilots have different costs and
duration to reflect that early results might clarify failure while
success requires performing a complete pilot sequence.
The exploitation module (see below) models drilling and
producing out the discovered sweet spot. The results of the
exploitation of the sweet spot in terms of a combined set of
petroleum production profiles and after tax net cash flows are
returned to the resource play exploration module for
aggregation.
Overall aggregates in terms of production profiles and
cumulative production as well as after-tax cash flows are used
to estimate economic performance of the effort to explore and
exploit the resource play.
The time horizon of both the sweet spot exploration effort
and the net cash flow discounting is defined explicitly. The
importance of the former will depend on the number of sweet
spots in the resource play and the rate at which they can be
explored and exploited. If desired, the simulation can be run
until the whole resource play has been played out.

Figure 2. Sweet spot size-by-rank

The main output of the resource assessment module is the

simulated size-by-rank of sweet spots in the resource play
(Figure 2). The assessment module also produces an estimate
of the total in-place resources in the untested area of the
resource play in addition to the estimate of the total number of
untested cells in the play and proportion of the untested area in
the resource play that is covered by cells.
Exploration of resource play
Exploration for sweet spots involves identification of the
potential location of a sweet spot (pre-pilot investigation),
acquisition of acreage, pilot production in a potential sweet
spot to test for sweet spot performance. Each activity has both
costs and durations. A failure (sour spot) results in both costs
and lost time.
The probability of finding a sweet spot determines whether
the pilot is successful. An exploration efficiency coefficient

The exploration and exploitation of the resource play can

also involve an initial development activity designed to
improve the technology required to both explore and exploit
the resource play. The duration and costs of the technology
improvement effort are included in the resource play
exploration and exploitation model. However, the effects of
the investment on sweet spot size, well productivity, drilling
durations and costs are handled exogenously in the
framework.
Exploitation of a sweet spot
Sweet spot exploitation models the drilling and production of
petroleum from the collection of cells in sweet spot. Activity
costs and durations as well as petroleum production are
modeled at the level of the individual cell.
Cell level drilling duration, drilling costs, operating costs
and well productivity is required in order to be able to capture
learning effects. Durations, costs and productivity are defined
as a function of cumulative number of wells drilled where
costs and durations will decrease with cumulative number of
wells while well productivity will increase with cumulative
number of wells.
Cell production is defined by an estimate of in-place
resources, an initial well production rate and a hyperbolic
exponent for each well.

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Number of rigs combined with the single cell drilling

duration defines the effective rate of drilling out the cells in
the sweet spot.
Duration and investment in shared production and
transportation infrastructure are defined for the sweet spot.
There can also be an incremental acreage acquisition fee.
Revenue and cost profiles are based on petroleum price
scenarios and cost inflation rate scenarios. Fiscal terms are
modeled explicitly in order to generate after tax cash flows.
The output of the sweet spot exploitation module is a
production profile for the sweet spot as a whole as well as net
before-tax and after tax-cash flows. The resource play
exploration and exploitation module aggregates the results of
sweet spot exploitation for over the set of sweet spots that are
successfully explored.

Figure 3. Aggregate yearly production for single sweet spot (in

million scf)

Estimating the Sweet Spot IGIP

Resource estimates of initial gas in place (IGIP) for the sweet
spot are the sum of free (fracture) gas and adsorbed gas.
These resources are modelled as two separate virtual
reservoirs for respectively the adsorbed and the free gas.
The free gas reservoir (called a segment) is modelled using
a traditional volumetric model while the adsorbed reservoir
includes parameters for shale density and gas content (see
Figure 4).

Figure 4. Separate segments for adsorbed & free gas

The two reservoirs capture the same bulk rock volume and the
overall resources are then the stochastic summation of the
resources with 100% correlated bulk volumes (see Figure 5).

Figure 5. Total IGIP

Sweet spot economics

Single sweet spot economics are modelled as a four-stage
process (see Figure 6). The two first stages are the exploration
phase that provides the initial identification of the sweet spot
and the appraisal phase that executes a pilot production.
Successful pilot production is then the basis for initiating the
development activities and the production for the sweet spot.
Development involves investment in necessary additional
infrastructure and facilities for initiating a manufacturing-like
style drilling and production.

Figure 6. Sweet spot exploration and exploitation

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Transitioning from the exploration to the appraisal phase

is controlled by the success of identifying a potential sweet
spot. Transitioning from the appraisal phase to exploitation
(development and production) is controlled by the results of
the pilot production.
The overall cash flow results are summarized in a box plot
(see Figure 7).

Figure 8. Sweet spot NPV outcomes

Concluding discussion

Figure 7. Overall cash flow from sweet spot project (in million
USD)

There are numerous other reports from the simulation of

the sweet spot economics that provide a basis for both
verifying and interpreting the implications for a decision to
invest in a sweet spot. A simple binary tree summarizes the
main activity outcomes (see Figure 7). As can be seen, the
simulation run summarized indicates that there is 25% chance
of not identifying a sweet spot. There is 18% chance that the
pilot production will not be successful while there is a 57%
chance of going to production.

This paper has presented the structure, main elements,

motivation and application of a framework for integrated
evaluation of risks, resources and value in shale gas resource
plays. The framework is modular, flexible and can be applied
to other types of unconventional resources.
We have reviewed the assessment of full cycle economic
evaluation of a single sweet spot in the shale gas resource
play.
Assessing the complete resource play involves
replicating the exploration-appraisal-development-production
activities for the other sweet spots in the play. In other words,
the activity definitions (see Figure 10) for the single sweet
spot are repeated for the other sweet spot targets in the
resource play.

Figure 8. Summary overview of sweet spot activity outcomes

The overall EMV of the illustrative project for the targeted

sweet spot is USD 124.6 million. Figure 9 shows the full
distribution of the estimated NPV outcomes.

Figure 10. Sweet spot acitivity definition

A key aspect of the approach advocated is that we assume

that wells in a sweet spot have similar but not necessarily
identical performance. This assumption can obviously be
relaxed. In the extreme case, the whole resource play can be
viewed as a single entity with full variability in well
performance. We then either ignore or assume that there is
we are not able to map any spatial, geological pattern in the
performance of reservoirs and associated wells.

References
Donovan, W.S., 2001, Coalbed Methane Content Determined with
Mudlogging Methods: abstract, The Outcrop, RMAG
Newsletter, 50, 11, November 2001.
Haskett, W.J., P. J. Brown, 2005, Evaluation of Unconventional
Resource Plays, SPE 96879, SPE Hydrocarbon Economics and
Evaluation Symposium 2005.
Roche, P., 2006, Liberation Play, New Technology Magazine,
Oct/Nov.
Schmoker, J.W., 1999, U.S. Geological Survey assessment model for
continuous (unconventional) oil and gas accumulatins the
FORSPAN model: U.S. Geological Survey Bulletin 2168,
Accessed December 1999.
Schmoker, J.W., 2002, Resource-assessment perspectives for
uncoventional gas systems, AAPG Bulletin, 86, 11, November,
pp. 1993-1999.
U.S. Geological Survey National Oil and Gas Resource Assessment
Team, 1995, 1995 national assessment of United States oil and
gas resources: U.S. Geological Survey Circular 1118, 20 p.

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