As potentially lucrative shale and deepwater assets compete for limited capital, it might be tempting to simply ask which is better.

But the answer is not so simple. For starters, the question begs further explanation of the word better—better in terms of resource potential or production, profit, upfront capital requirements or something else. Then, there are the assets themselves—each being unique, having its own set of advantages and disadvantages as seen in the eyes of the beholder.

The energy research and consulting firm Wood Mackenzie examined what it described as an intense rivalry between the two “fundamentally different and seemingly incompatible” investment themes in a white paper released this week. As part of its assessment, which follows an earlier study on risks associated with high-impact conventional and unconventional exploration, the firm analyzed 300 shale and deepwater assets of companies to determine whether economic evidence supports the rationale for unconventional resources. The study’s release comes as oil and gas companies continue to exercise fiscal discipline, reducing E&P spending and workforces.

“There is a wide range of rewards from unconventional and conventional opportunities, and nature and business economics deny us the neat generalized conclusions on attractiveness we often crave,” states the report co-authored by Preston Cody, senior managing consultant, and David Branley, head of upstream consulting for Wood Mackenzie. “Corporate strategists should identify and prioritize their portfolio needs and have a clear strategic rationale for each resource theme in their portfolio.”

The project analyzed six areas:

  • Large-scale resource potential. Of the assets analyzed, the resource potential from new shale gas and tight oil (SG/TO) projects was about 54 Bboe, compared to about 28 Bboe for deepwater projects. But the study pointed out that the volume of hydrocarbons is not equally spread between the assets. About 50% of the total resource base for the tight oil and shale gas projects was concentrated in the top 15% of assets; for deepwater, it was the top 10%.
  • Drilling inventory. In this area, the analysts gave the advantage, with a caveat, to unconventional plays, given their large acreages’ abilities to provide decades of drilling inventory. Larger resource plays are easier to manage in terms of investment, according to the report, which showed most of the unconventional projects provided between 10 and 21 years of drilling compared to six to 14 years for deepwater projects. But “unconventional volumes carry a deferred value penalty,” according to the report.
  • High returns. While the report stated that both types of assets can deliver strong returns, deepwater projects were deemed superior, “with most projects enjoying 16% to 30% after-tax rates of return, versus 9% to 21% across the SG/TO projects.” Deepwater projects in the Gulf of Mexico and offshore Brazil and West Africa had the best returns offshore; compared to tight-oil focused Eagle Ford, Permian, Duvernay and Cardium plays.
  • Fast production growth. The unconventionals reined in this area. “By 2020, production from the SG/TO projects will more than double to over 4 [MMboe/d], with post-2009 deepwater discoveries reaching 1 [MMboe/d].”
  • Low capital requirements. In some cases large upfront costs associated with deepwater developments puts such assets at a disadvantage compared to the SG/TO assets. Though operations can be costly, “early revenues from fast production growth can offset some of the capital investment.”
  • Value. When it comes to value, “higher margins for deepwater provide higher value per barrel and better capacity to absorb price and cost risks,” according to the report. The lower SG/TO value was attributed to plays that have high gas-to-oil ratios, and the lower value of gas compared to oil in terms of heat content equivalent.

“There is no settling this debate once and for all, because there is such wide variation within unconventional plays and within conventional plays. There is very significant overlap in the opportunity space between the two play types, and so no uniformly superior type,” the report stated. “Both exhibit a log normal distribution, which means that volume and value [are] concentrated in the best acreage or the biggest fields, with a long tail of more marginal assets.

“There is no such thing as a ‘typical’ shale or an ‘average’ deepwater discovery. Trying to select single representative examples and normalizing them so they can be compared winds up distorting rather than clarifying their strategic differences.”

Of the 300 assets analyzed, 203 were deepwater fields and 97 were SG/TO plays. However, the report noted that overall investment patterns for the two types of assets were more balanced.

Contact the author, Velda Addison, at vaddison@hartenergy.com.