Convention Vs. Non-Conventional Oil and Gas Plays

Convention Vs. Non-Conventional Oil and Gas Plays

The best place to start is by defining the 2 terms. After completing some research, there is no standard definition that either oil companies or even governmental entities can wholly accept. From a technology standpoint, it’s even more ambiguous as methodologies for exploration, drilling, and Completion of wells are interchangeable based on geographical and geological factors.

I like to think of the difference between conventional vs. non-conventional as where known oil or gas sources could not be accessed in the past economically without technology advances introduced in the early 90s. Shales and heavy oil sands are the best examples of source material for non-conventional plays. For instance, people have been drilling vertical wells just above the Eagleford Shale into the Austin Chalk for decades, and the Eagleford was the known source rock for Austin for decades. Still, no one could take advantage of going directly to the source without advances in hydraulic fracturing and horizontal drilling techniques.

Since we deal with mostly U.S. plays, we will base our definition of non-conventional, starting with onshore shale and conventional as just about everything else onshore.

Cost of Entry: Non-conventional plays require much larger acreage purchases of leases (typical spacing of shale wells is 80 acres) and even larger budgets for exploration, reporting, development, and operating expenses. For example, a single well into shale (Eagleford or Bakken) will cost millions of dollars due to the depths, the horizontal aspect, and the multi-stage fracking. Typical wells can run from $8-$12 million USD. A conventional vertical well drilled to the same depths into conventional sands will cost 1/10 that cost at most.

Operator Availability: All of the Big Boys have booked services for drilling, Completion, and multi-stage fracking months in advance. In most cases, you can find an operator to drill vertical wells no more than a month out at most as there are more of them available.

Drilling through Production Timeline: Non-conventional wells can take upwards of a year to drill, complete, and perform multi-stage fracking (up to 20 stages in some cases). Typical conventional wells can be up within a month. Both assume no unforeseen delays due to weather, operator availability, tangibles availability, loss due to theft or breakdown, etc. I’ve seen shale wells take up to 2 years before coming online.

Decline Rates: Typical decline rates of non-conventional plays are dramatic. You could I.P. at 400 BOPD and be at 20 BOPD in 2 years, and your investment must be made back within the first 6 months, or you’re underwater. Conventional plays have much less dramatic decline rates where payout can be made out in a year and keep producing monthly checks for significantly longer.

Ongoing Development: With most non-conventional programs, I’ve seen the need for continuous cash calls to keep drilling to stay on top of profits. Clients who have invested in shale through other sources have told me stories about the endless cycle of checks coming in and going out. To them, it has become a headache to manage. These individuals were looking for investments and keeping their day jobs, not to create another job for themselves. Typically, most conventional plays allow for greater time spacing for lease development to keep production numbers the same.

Market Price Differential: Some conventional oil and gas are lower in gravity, therefore receiving less than market value. Bakken oil typically sells for less than $20 below WTI due to transportation, lower gravity, storage, and refining capacity.

In short, non-conventional plays are for the more aggressive investors with deep pockets and patience. If this is your game, I can find deals for you. Don’t get me wrong… you can make a great deal in returns, but the margins are typically lower, thus making it riskier if the price of crude dips below today’s prices even 30%. Conventional plays offer an opportunity to enter deals at a lower price level and see checks quickly return to you without the constant need for cash calls.