Application of Stochastic Petroleum Economics for Unconventional Resources: Estimating the Gas Break-Even Price for a Liquids Rich Unconventional Development
Authors: MacPhee Michael , Anuar Shamsul , Alhayaf Abdulbari 
Published: February 2024

To assess the economic viability of a liquids rich unconventional gas project, a break-even sales gas price (BEP) is determined. The calculated BEP for such projects is uncertain as market pricing and revenue from secondary liquid production is uncertain. This secondary revenue provides a partial yet significant offset to capital and operating costs. Through the application of stochastic methods, uncertainty associated with the required project sales gas BEP can be calculated to inform management decision making.

Stochastic economic evaluation of a generic unconventional gas development was undertaken using synthetic data. Fluid windows range from lean (dry) gas to liquid-rich with multiple uncertain secondary product revenue streams from these fluid windows impacting heavily on the resulting sales gas BEP. Further impacting the sales gas BEP are other uncertain inputs including: capital costs, operating costs, production, and project timing. Probability distributions were assigned to forecast secondary product prices, capital and operating costs. Through the application of this model combined with a novel approach to calculating the BEP (after-tax), uncertainty associated with the resulting BEP can be calculated.

The model delivered clear visibility on BEP uncertainty. Key statistics include the mean, median, percentiles, and probability of the project BEP exceeding defined price thresholds.

The primary purpose of completing a stochastic economic evaluation for capital intensive oil and gas projects is to understand uncertainty associated with the expected project NPV to enable a project FID decision. In jurisdictions with a regulated natural gas market, selected gas projects receive a fixed long-term gas price with infrequent ability to renegotiate the gas price. The fixed gas price is established by the regulator with intent to provide the producer with a fixed rate of return. However, for liquids rich gas projects, the project return is never truly fixed given significant exposure to market pricing for these secondary products, amongst other factors. Hence it is essential to understand the probabilistic nature of the BEP.

Given significant capital requirements for necessary upstream and midstream infrastructure, once an investment decision has been made, a continuous drilling campaign must be sustained to ensure full use of this fixed infrastructure. Once the primary build-out of this infrastructure is complete and given relatively certain drilling and rigless costs, the primary uncertainty becomes pricing and revenues from secondary products.

This model supports decision making by providing visibility on the expected BEP and probable range of the BEP. The model results also established a clear relationship between gas BEP and pricing for secondary products.

In contrast to traditional stochastic economic analysis focused on project NPV, the focus of this analysis is on the implied after-tax BEP. Given thousands of iterations are required to perform stochastic analysis, use of the common excel-based goal-seek function to identify the BEP is impractical. Instead, a formulaic approach to estimate the after-tax BEP was employed, enabling the concurrent calculation of the after-tax project BEP during each iteration of the stochastic simulation.