How much does a shale gas well cost? ‘It depends’

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An oil drilling rig is seen drilled into the Bakken Formation, one of the largest contiguous deposits of oil and natural gas in the United States.

A satellite photo of the Earth at night taken 10 years ago with natural gas reserve concentrations superimposed depicts a world where the resources are not located near the major population centers, which are clearly identified as large visible light clusters.

Fast-forward a decade and superimpose shale gas resources on current nighttime satellite images and one observes natural gas resources much closer to the world's major metropolitan areas where power generation demand is highest.

This is how Ken Medlock, senior director of Rice University's Baker Institute Center for Energy Studies, set the stage for his natural gas market presentation at last week's USAEE/IAEE North American Conference held in Anchorage, Alaska.

Medlock's team extensively researched U.S. shale gas play breakeven prices, a major discussion topic and source of disagreement among analysts and industry participants in recent years. Everyone wants to know what Henry Hub benchmark gas price is required for an unconventional well to recoup costs and turn profitable. The less than satisfying but most accurate answer is "it depends."

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"Some wells are profitable at $2.65 per thousand cubic feet, others need $8.10 … the median is $4.85," Medlock said.

The presence of natural gas liquids—which fetch higher prices than dry natural gas—is one major factor, but infrastructure access, lease costs, local fiscal conditions and other variables contribute to well economics.

Similarly, well-specific estimated ultimate recovery (EUR) can vary substantially within a play, said Medlock. For more detailed EUR discussion, read Breaking Energy's coverage here.

In statistical terms, "the central tendency of distribution matters," he said. Operators have portfolios of wells and the average production cost gives you a marginal cost.

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Medlock also cleared the air with regard to the interplay between rig count and production volumes. Many analysts and industry observers pay close attention to natural gas or oil rig count data, which tells you how many rigs are operating at a given time.

"Rig count and production is highly non-linear," said Medlock, who explained that companies lay down their least productive rigs when commodity prices dip. By leaving the most productive rigs running, overall production volumes will not correlate directly to changes in rig count.

One also cannot directly translate shale gas development costs in U.S. plays to other prospective areas around the world. For example, a 10,500 vertical foot well with a 4,000 foot lateral in the Haynesville Shale costs about $8 million, Medlock said, but the same well in Poland would cost $14 million to $16 million.

This is because shale gas development in Eastern Europe is an immature industry and a company would need to import equipment, fracking crews, etc.

—By Jared Anderson, Breaking Energy writer.