Economists show that technology adds value to shale plays.

Sustained high oil prices and severely depressed natural gas prices have led to a huge surge in the number of wells being drilled in shale oil plays in North America. But, as panelists discussed during the economics panel at Hart Energy’s Developing Unconventional Oils Conference in Denver, success in one oily play does not mean equal success in another. Three speakers examined the economics of three different hot plays in the U.S. and Canada – the Permian Basin, the Niobrara, and the Bakken.

Michael Bodino, managing director, investment banking, at Global Hunter Securities named his talk “The Economics of the Permian Basin: Making the Curve.” The Permian Basin, which has been producing oil and gas since the 1920s, is currently one of the hottest plays in the U.S., with zones that were previously dismissed turning into major plays. 

Bodino said the region has benefitted from the movement of capital to liquid-rich plays.

Surprisingly, though, different areas of the Permian Basin are seeing different technologies applied, with the lion’s share of horizontal drilling taking place in the Delaware Basin.

Part of what makes the Permian Basin such a promising play is the potential for numerous pay zones, he said. “There are potential reservoirs on top of potential reservoirs on top of potential reservoirs,” Bodino said. “There’s a lot of upside, and we’re just scratching the surface in terms of drilling, completions, and horizontal wells.”

The ramp-up in activity has been astonishing. Bodino showed permits from 2010 to the present. In all of 2010 there were 180 horizontal permits given. Year-to-date in 2012 there have been 400.

“What’s not to love?” he asked, adding that even in a lower price scenario with lower EURs the play still has good economic results.

The Niobrara is a different animal, according to Jessica Chipman of Tudor, Pickering, and Holt. In a talk titled “The Niobrara: A Look into the Weird Science of Tight, Light Oil Plays,” Chipman reviewed the results of a 2011 publication that looked into the play in detail to determine why it demonstrates such variability. After EOG’s Jake discovery in 2010, she said, a land rush ensued as companies snapped up acreage and touted the play as “the next Bakken.” Some of those companies ended up with very disappointing well results.

Chipman’s team looked at every single well that had been drilled to date and learned two things: one, it’s early days for the Niobrara yet, particularly outside of the Wattenberg field; and two, the reservoir is quite variable, so well location is very important.

In examining the dusters, almost every early disappointment was drilled without seismic. Wells that were drilled out of zone also encountered problems with proppants swelling in the surrounding marl formations.

Another discovery was that resistivity and thermal maturity vary throughout the basin, leading to large changes in water saturation and areas where there hasn’t been enough heat and pressure to establish a hydrocarbon system.

What matters, the report concluded, was a checklist that includes seismic, resistivity studies, thermal maturity, pressured reservoirs, natural gas in situ, proper well orientation, and the presence of natural fractures.

Sylvia Barnes of KeyBanc Capital Markets discussed the Bakken, a play she called “a game changer for oil and gas in America.” The Bakken is a true success story, she said, because the industry has figured out how to use technology to change the landscape.

“It took time, money, and tenacity to develop this play,” she said.

Already North Dakota is the fourth largest producing oil state in the U.S., and it’s expected to be second soon, trailing only Texas. The area has grown from 219 wells in 2001 to 3,345 by the end of 2011. Currently 1,355 wells are drilling for oil in the Bakken, and production hovers at almost 500,000 bo/d.

The industry has thrown a host of technologies and techniques at the Bakken, including pad drilling, water recycling, reduced spacing, disposal wells, longer laterals, zipper fracs, better infrastructure, and even 4-D seismic. With the attractive economics of the Bakken, it’s little surprise that deals have risen steadily. “The market values the productivity of the Bakken,” Barnes said.

She used the example of Brigham Exploration, a dominant player in the Bakken before selling out to Statoil. The company had 874 de-risked drilling locations and sold its assets for approximately US $12,000/acre.

“They implemented an aggressive, continuous improvement strategy,” she said. “They used every tool in the toolkit.”

Kodiak Oil and Gas is another company that has used economics to its advantage in the Bakken. Through two key acquisitions, the company has seen a 100% increase in reserves and has grown from $120 million to $2.3 billion in market cap since 2009.

“They used the same technology as Brigham,” she said. “It isn’t cheap, but the economics are worth it.

“This play is important to America,” she concluded.