Horizontal vs Vertical Wells

I stumbled across an interesting analysis of a new technological process, horizontal drilling and extraction of shale natural gas. Read the whole thing here but here is the key chart comparing horizontal vs vertical wells:

Comparative production from a vertical and horizontal natural gas well (Chris McGill).

Production Volume

One thing that did strike me is that the horizontal peak production is well above the vertical well but has a shorter life span. Horizontal wells do have significant technical challenges (as seen in the article), but perhaps we can analyse the above chart to give us an idea of the benefits of horizontal drilling. Now to do this is a little tricky, as I do not have the original chart. However, using Photoshop, I was able to extract the area of the chart and the scale to get us total volume (note these are approximations only, but it gives us a “back of the envelope” view):

• Vertical Well (Yellow): 3547 MMFC
• Horizontal Well (Orange): 6097 MMFC
• Horizontal to Vertical Well total production gain: +72%

Judging from the chart the horizontal well extracts and extra 72% more oil in 10 months versus 100 months for vertical wells.

Production Value

Now to estimate the total value of the well let’s assume the price of natural gas is stable (at Henry Hub) at $8.00 per MCF:

• Total value of the horizontal well is  6097*1000*$8.00 = $48,776,000
• Total value of the vertical well is 3547*1000*$8.00 = $28,376,000

Time Value of Money

This is where we get to use some basic financial models to determine the value of horizontal wells compared to vertical wells. The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. As an example, with an interest rate of 5% per annum, 100 dollars received today is equivalent of receiving 105 dollars in a year’s time.

Note that the horizontal well lifetime is 10 months compared to the vertical well lifetime of 100 months. Thus to be fair we need to compare the value of the horizontal well and the vertical well after 100 months. This is where the Time Value of Money comes in. Let’s pretend we bank the $48,776,000 that the horizontal well extracts, thus after 100 months (assuming 5% interest rates):

• Total value of horizontal well at 100 months: $70,913,392
• Total value of vertical well at 100 months: $28,376,000
• Horizontal to Vertical well gain: +150%

Extraction Costs

I do not know, in detail, the relative difference in extraction costs for these two methods. However, we now have the Horizontal to Vertical Well gain to use in our decision making. If the Horizontal to Vertical well cost is less than Horizontal to Vertical Well gain (+150% in our example), then it becomes economical to use the horizontal well method.

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