The principal difference with the shale oil or gas production is the production forecast. The standard reservoir of a geological formation has nothing to do with a geological formation that must be fracked to free the oil or gas. The only common outcome is the Estimate Ultimate Recovery (EUR) over the life of the wells life. This EUR can be extremely misgiven if not understood.
Not wanting to be too technical, from a financial point of view, there are 3 basic components in arriving at the EUR.
1. The initial Production rate (IP) seen during the first few months, one year max, of production.
2. The assumed declining rate of production, forecast during the following years 2.
3. The assumed declining rate of production, forecast during the following years 3 and 4.
4. The assumed residual declining rate for the left over projected profitable life of the well.
Empirical data associated with shale O&G production where fracking is the method used for production is extremely telling. Following the IP a production drop of 70% must be contemplated. The declining production rate can be 30% for the following 2 years and 15% for year 4 and 5. The rest of the well life should decline 10% per year. The EUR is the average production over the expected life of the well. Assuming that the expected life of a well is 14 years, the production rate is forecast as follow:
Year 1: 50Mb/d. Year 2 and 3: 35Mb/d. Year 4 and 5: 1.5Mb/d. Year 6 and so on: 158 b/d. This EUR is 6.945 b/d. On the face of it is a descent production, but extremely misgiven. It is front loaded in the first 4 or 5 years with a EUR of 19,415 b/d a descent production. The production rate is declining so much in the latter years that only a gusher in the 100Mb/d would be producing descent revenue in the latter years. 100Mb/d EUR after 6 years of 38.830 b/d
When looking at MLPs or US Royal Trust associated with fracking technology, the drop in distribution is caused by this EUR and its missed understanding. The only way t