There are ways to save millions and billions of dollars in oil and gas acquisition and divestment projects. Here are some tips that, based on my experience, can change the value of a project significantly:
- Always forecast production volumes for oil, gas, and water separately (GOR, CGR, and WC are changing in time) on Standard Condition (atmospheric pressure and ambient temperature).
- Generate low, base, and high cases based on different b-factors and terminal declines.
- Group the wells based on completion size and well spacing, and be very granular on generating your type curves (e.g. every 3 miles * 3 miles, as long as you have around 8-10 wells). Don’t bundle 200 wells and call it a “Type Curve!”
- Don’t be fooled by some big IPs (Initial Production tests). High IPs don’t always mean higher EURs. Most of those wells have very high initial decline.
- Estimate uplift potential based on varying completion size and well spacing for each of the type curves and always consider a discount factor for future infill drillings.
- Try not to pay for the potential, unproven upside due to larger completion design (not always bigger completion means more EUR and better economics).
- Check your economic input assumption 10 times (literally)!
- Check if royalty owners are responsible for paying their share of mid-stream tariffs or not (this can change from one lease to another).
- Include downtime (shut-ins) in your type curves. This has a big effect on the NPV of the project.
- Always include some percentage of totally uneconomic wells for future drills, due to different known/unknown reasons, such as faults, failed casing, bad cement jobs, …
Economic and forecasting assumptions make a huge impact on project’s value. The same project can have a $1.5 billion or $1.0 billion value simply by changing midstream assumptions or price differentials. Also, always be careful about those simplified criteria, such as $/acre or $/boe; every project is different, and not all boes are the same.
Now, it’s time to get practical! Let’s put some of these rules to the test!
To see the effect of economic and forecasting assumption (rule #2 and rule #7) on project value, we analyzed 1028 Eagle Ford wells located in the southern portion of La Salle County. These wells are mainly operated by BHP, Lewis, Carrizo, EP Energy, Anadarko, and Statoil. We forecasted all of these wells individually to estimate reserves and value.
These wells (only producing) have a NPV10 of $724 MM with 175.5 MMboe of reserves based on 100% working interest.
This pie chart shows the cost breakdown for this project:
Now, we have changed our input assumption by +/- 30% and recalculate NPV10. Here is the output summary:
- 30% lower LOE & tariffs will increase the NPV10 by 45%.
- 30% higher gas price improves the value by 25%.
- 30% increase in reserves boosts the NPV10 by 57%.
- 30% higher oil price improves the NPV10 by 42%.
It is fascinating to notice that changing LOE & tariffs has more impact on NPV10 than oil price or gas price!
Reserves, which is affected by production forecasting, affects the NPV10 by a whopping 57%!
Simply ignoring any of those rules will change the value of the project substantially and can cost you millions!
To download the full report on Southern La Salle click Here.