Trade-offs and implications of two-stage versus one-stage unconventional oil and gas exploration and production investment strategies : a case study of the Barnett play

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Jang, Wonjae

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This study considers, first conceptually and then empirically using actual completion and production data, which unconventional investment strategy has superior profitability. In particular, it compares two-stage investment (single with infill drilling technologies) with one-stage investment (cluster drilling technology). The conceptual model uses Net Present Value (NPV) analysis to discuss the plausible outcome and, also, lays the foundation for the empirical analyses. The empirical analyses comprise two parts – the first part examines a particular acreage to test whether incremental knowledge of geology results in reduced production uncertainty. The second part looks at various candidates across the Barnett play to compare the superiority between the strategies in terms of Expected Ultimate Recovery (EUR) and NPV. The importance of the learning curve in assessing the production uncertainty is often overlooked in the economic evaluation of unconventional investments. As unconventional resources are extremely heterogenous in their geological attributes, special attention must be paid to the individual acreage when addressing risks and corresponding economic values. The empirical analyses reveal that the risks do not necessarily decrease with time due to technological changes and/or lack of effort to develop a better understanding of the geology. As a part of the trade-off discussion, recovery profile, profit over time and information profile between the two investment strategies are emphasized. Other important factors that can affect the profitability of an investment include price and extent of cost savings. Relatively little attention has been paid by academics on the economics of unconventional resource investment strategies. The present research strengthens the collective understanding of unconventional resource economics by suggesting some insights for unconventional resource producers to better assess their investment strategies.


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