Development of unconventional shale gas
resources involves intensive capital investment accompanying
large commercial production uncertainties. Economic
appraisal, bringing together multidisciplinary
project data and information and providing likely economic
outcomes for various development scenarios, forms the
core of business decision-making. This paper uses a discounted
cash flow (DCF) model to evaluate the economic
outcome of shale gas development in the Horn River Basin,
northeastern British Columbia, Canada. Through numerical
examples, this study demonstrates that the use of a single
average decline curve for the whole shale gas play is the
equivalent of the results from a random drilling process.
Business decision based on a DCF model using a single
decline curve could be vulnerable to drastic changes of
shale gas productivity across the play region. A random
drilling model takes those drastic changes in well estimated
ultimate recovery (EUR) and decline rates into account in
the economic appraisal, providing more information useful
for business decisions. Assuming a natural gas well-head
price of $4/MCF and using a 10 % discount rate, the results
from this study suggest that a random drilling strategy (e.g.,
one that does not regard well EURs), could lead to a
negative net present value (NPV); whereas a drilling
sequence that gives priority to developing those wells with
larger EURs earlier in the drilling history could result in a
positive NPV with various payback time and internal rate
of return (IRR). Under a random drilling assumption, the
breakeven price is $4.2/MCF with more than 10 years of
payout time. In contrast, if the drilling order is strictly
proportional to well EURs, the result is a much better
economic outcome with a breakeven price below the
assumed well-head price accompanied by a higher IRR.