A Shale Gas Field
James Henderson
April 2021
The Economics of Energy Corporations (2)

Shale Oil Production Profile
1.Immediate surge to peak production
2.Rapid decline over the first few years
3.Long plateau at low production rates
A shale oil or gas field production profile

Let’s model a shale gas field
•Resources and reserves – 1000bcf with 10% recovery rate
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•Start date –year after first investment
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•Peak production – 25% of reserves
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•Time to peak – 1st year
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•Length of peak – 1 year
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•Decline rates – 50% in year 2, 35% yr 3, 25% yr 4, 10% from then
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Gas Price



2020
2030
2040
0
100
200
300
400
500
1990
2000
2010
Industry
Non-combusted
Power
Buildings
Transport
Growth in natural gas demand…
Bcf/d
600
Gas consumption by sector
Gas share by sector
0%
10%
20%
30%
40%
50%
1990
2000
2010
2020
2030
2040
Industry  Buildings
Transport
Non-combusted  Power

Less gas switching
Renewables push
Faster transition
Even faster transition
Prospects for gas demand could be dampened
Gas demand growth  2016-2040
% per annum
-0.5% 0.0%    0.5%      1.0%     1.5%
Gas share of primary energy
1990-2040
15%
17%
19%
21%
23%
25%
2.0% 27%
1990
2000
2010
2020
2030
2040
Evolving transition
Less gas switching  Renewables push
Faster transition
Even faster transition
Evolving transition

Gas prices have been falling and converging
Gas increasingly priced relative to competing gas supply
Rising supply and a recent fall in demand saw price 2018-2020
Winter 2020/21 underlined risks of short-term market dislocation, in this instance due to cold
weather
Global gas prices

US shale gas production has risen sharply and looks set to continue
EIA: Shales to Power Domestic, Global NatGas Production Growth ...


US gas is now being exported
US LNG projects set to expand


Is it worth exporting US gas?
European gas price versus US LNG at cost


Decline in natural gas prices exaggerated by Covid-19
US (Henry Hub) Gas Price
5-yr average

US Gas Market – demand remaining weak due to higher prices



US Gas Market – price outlook
text
Short-Term Energy Outlook - U.S. Energy Information Administration (EIA)

WACC Calculation
A Small Shale Producer
•Risk free rate – 1.75%
•Corporate Interest Rate – 3.5%
•Equity Market return – 10.53%
•Company Beta – 2
•Corporate Tax Rate – 20%
•Debt/Equity – 60:40
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•What is the WACC (discount rate)?
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•What is the breakeven gas price?
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