The Top Unconventional Gas Play

Focus: STOCKS

Eoin Treacy Image Eoin Treacy Global Strategist, Fullermoney.com

We’re getting to a point where traditional valuations for natural-gas companies aren’t able to keep up with new extraction methods, notes Eoin Treacy of Fullermoney.

This report by Allen Brooks for PPHB covering the US energy sector has a section on the economics of unconventional gas drilling:

"In conventional gas projects, significant upfront investments are made to tap into the whole of the interconnected gas reservoir at once, applying a tailor-made and optimized field development strategy. The present value of conventional gas fields is continually maximized by applying a rigorous value assurance review (VAR) system, using pre-determined decision gate-stages as part of the company’s auditable records.

"As a result of the established VAR process, cash flows of traditional or conventional gas projects invariably perform adequately. In contrast, field development plans for unconventional gas operators are highly susceptible to economic pressures.

"The traditional VAR process does not provide a guarantee for profitable unconventional gas operations. A fundamental handicap for unconventional gas development projects is that optimized well development and maximization of net present value are marred by much higher subsurface uncertainty.

“There is no gas interconnectivity between wells in unconventional reservoirs and the lack of gas communication means appraisal well data give very limited information over the rest of the acreage under leasehold or licensed. High variations in reservoir quality cannot be excluded by initial appraisal wells.

“Sweet spots only emerge gradually and after considerable expenditure has been made while the drilling of new wells advances to cover the acreage acquired.