A cost comparison between tight oil and shale gas

Note that these are rough estimates compiled from company presentations.

These are based on reported drilling and completion costs, and estimated ultimate recoveries (EURs) per well, as reported by various companies.  There are a few things to note here.  Both the capex and the opex related to extracting unconventional oil are much higher than for unconventional gas.  Estimated total direct costs for the most economical oil regions (Eagleford, Bakken, emerging Niobrara region) are in the neighborhood of $40-$50 per barrel of oil equivalent.  Note that this excludes land costs, and perhaps some infrastructure costs- transport costs are included in opex so that handles some infrastructure costs, but it isn’t clear whether this just means cash transport costs, or includes company owned gathering networks.   Wet gas, for the same energy equivalent has direct costs of a little more than a third of this for the most productive regions of the Marcellus.  Dry gas costs are the lowest overall, with capex plus opex direct costs in the neighborhood of $1.25 per mcf or $7.50-$8 per barrel of oil equivalent (BOE).  This massive cost difference on an energy equivalent basis means that gas prices are likely to stay far below oil equivalence for far into the future.  It also means that there would be a huge economic advantage for the USA to shift to cheap gas and away from expensive oil as a transportation fuel.

The reason why there is so much more activity in the oil regions than the gas regions is two fold.  For one, the price of oil is much higher on an energy equivalent basis.  With Brent oil at $109.50 per barrel currently, there is plenty of money to be made in unconventional oil.  Gas at $4.74 is trading at about $26/ BOE.  So gas costs about 1/5 of oil to produce but also earns between ¼ to 1/5 of the price of oil when it is sold.  Gas has also plunged to as little as $2 per mcf or $12 per BOE at times in the recent past, while the oil price has remained quite stable.  Next is the infrastructure problem.  There are infrastructure issues with the oil regions, but they are relatively simple compared to the most economical gas region.  Two of the big three oil regions are in Texas, where pipelines exist and more can easily be built.  These two regions, the Eagleford and Permian, are conveniently close to the biggest oil importing region with the largest refining capacity of anywhere in the world, the US Gulf Coast.  Bakken has proved more problematic due to obstacles related to building intrastate pipelines (see Keystone XL), but this issue has largely been solved by moving oil via railcar, just like they did in the 1800s.  Gas is not so simple.  The problem is that there is limited domestic demand growth, and it is very hard to ship overseas.  Also, the area with the most production constraints, the Marcellus, is also the lowest cost producing region and the threat of more Marcellus production chills investment in other regions.  Even if you can make a return in basins like the Haynesville and Barnett, producers risk major price declines when Marcellus bottlenecks are alleviated, since costs are much lower there.  Besides natural gas pipeline capacity, there have also been limitations on ethane take-away capacity.  Ethane is either left in the gas stream, or used in plastic manufacture on the Gulf Coast.  There are limits to how much can be left in the gas stream, and the fluid is too volatile to be moved economically except by pipeline.  Some of the most economic wells were the wet-gas wells in southeastern PA, but these have so much ethane that drilling has been constrained until they could get pipelines to take the ethane to the gulf coast.  At times there has been so much excess ethane that the price went to $.01 per gallon at one point at the Conway hub.  So despite phenomenally low production costs, the Marcellus and nearby Utica shale production has been constrained by transport capacity issues.