I recently signed an oil and gas lease to allow a driller to drill for gas in the Barnett shale under my home. The 18-month (an unusualy short term) lease, which was negotiated by a committee for the town of Pantego, calls for a bonus payment of $15,000 per acre with a royalty of 25%. This sounds like a lot of money. Pantego covers just over one square mile (640 acres) so the driller paid $10 million for the lease. I did some analysis to see what the economics of the situation are.

Based on info from the internet, the Barnett Shale is about 10,000 ft. down and is 500 ft or more in thickness. The Barnett shale has a high Total Organic Content (TOC) of 4.5%. THe pressure is 4000-5000 psi. It is a tight gas formation with low porosity, and low permeability. Vitrinite reflectance in the East Tarrant County region is high at over 1.4 indicating that the gas is very dry. About 60-65% of the gas is in pores, and the rest is absorbed into the shale. When a well is drilled the gas comes out of the pores rapidly, and after the pressure is down, outgasses from the shale for a long time, perhaps 20 years. The key to producing the gas is in the fracturing of the shale so that the gas can flow into the well bore. The fracturing process involves pumping high pressure water filled with sand into the formation. The water breaks the shale, and the sand keeps the cacks from closing back up. Typically best success is achieved with horizontal wells drilled in the middle of the shale formation. Many laterals of about 5000 ft. length are drilled from a single vertical site. Typically the fracture region extends out radially about 250 ft. Thus optimum performance is achieved by drilling the laterals 500 ft. apart. Originally the information I had indicated that recovery was about 18-20% of the gas in the formation. In Sunday's Ft. Worth Star Telegram there was an article that said current anticipated recovery is about 50%.

The analysis I did yielded an estimate that there would be 149 billion scf of gas per sq. mile. The Ft. Worth Star-Telegram article estimated 150 billion scf per sq. mile. That is surprisingly good agreement, whcih indicates that the info I got from the internet on the Barnett shale was pretty accurate.

Now looking at the economics, it might cost $25-30 million to drill the well under Pantego and put it into operation. If there are 150,000,000,000 scf under Pantego, and 75,000,000,000 scf can be recovered then at $8/1000scf the total value of the recovered gas would be $600 million. After the royalty, the value would be $450 million. Of course it would take 20 years to get it. However most of the gas is recovered in the first two or three years, so the investment looks pretty good.

At a recovery rate of 20% the investment would be attractive, and at 50% it looks great. (There's a good chance that the price of natural gas will go up over the next 20 years.