I’m not sure I have the answer that you’re looking for... To be honest, I don’t think anyone out there (no analyst, no NG company) has accurate numbers and the reason for that is that (to my knowledge) there aren’t any shale plays anywhere in the world that have been “played out” AND used the current horizontal fracture technology. Every number you’ve seen is a guess based on a number of variables.

So let’s take a step back for a second and look at what the question really means... How much NG must a well produce during its usable lifetime to “recover” the costs of drilling it and maintaining it over that lifetime?

If a well costs $6M to drill, and it has an average stabilized flow rate of 1.5mmcf/d over a number of years (not 30 days, but years), and the average NG price over those years is $4/mcf (quite low), then that well will recover the original $6M after about 2.74 years.

Then we have to add the variables... That $6M could have been interest bearing in some bonds instead or at a minimum effectively cancelling out the effect of inflation. The royalty that is paid to various governments, property owners or a combination of both (12-25% depending) reduces your $/mcf or an equivalent portion of your 1.5mmcf/d flow rate (however you want to work the math it doesn’t matter), increasing your payback time. The transport costs of your gas from the well head to the market also varies, but can easily be $1/mcf (virtually $0 in our case though). The NG companies like QEC or Talisman also need to make a profit or a reasonable ROI (return on investment), so let’s say that’s at least 10%, again increasing the time it takes for payback.

Now here is the rub... Vertical wells started to be fractured around 1950 and these produced for 10+ years. Horizontal fracing started to be used around 1990 and many of these wells are still producing 20 years later. Fast forward to 2010 and the frac fluids and chemicals have changed, the propants have changed, the hydraulic pressure for the fracs has increased many times over causing the radius or distance the fracs travel out from the borehole to increase dramatically, the length and number of fracs has doubled, tripled, quadrupled from the early days, 2D and now 3D seismic has improved dramatically helping to make sure that your hole is actually in the middle of your geological formation to ensure you get the best fracture coverage in the rock you’re fracing. This also means you’re getting fewer bad wells, overall increasing the economics of the play. We also have this trend over time and ability to go deeper where the gas is under more pressure.

So at the end of all this you have to ask yourself two things, how long will the wells produce, and which variables effect the specific play you want the “break even” price for. The variables change over time, royalties go up, and I think you’ll see them come down as well with different regions competing for NG producers to exploit their shale. Even if we double the break even time at $4/mcf it’s only 5 years, hell let’s make it 10 years to quiet any bashers out there, and that still leaves an extra 10+ years of production of pure profit including the high volume initial years and the low volume trailing years. With the newer frac processes older wells are being refraced and getting renewed life. Is that because the original fracs weren’t very efficient? If that’s the case, maybe the newer wells fraced in the last few years might last 30-40 years...

We just don’t know. Nobody knows because there isn’t one play that’s used the latest technologies that has played out. We’ll have to wait another 10-20 years for wells that were fraced around 2000 to get played out so that we can actually figure out what the Total Return on Investment really was, and even then, the technology has improved a lot over the last 10 years so those “2000” numbers will be low. However, that will be the first time we’ll have pretty solid numbers to calculate the “minimum NG price a play is economical at”.

So unfortunately, I don’t have a great answer for you other than to say it’s totally dependent on what assumptions you make.

Brym